Competition and the signaling role of prices

Fabrizio Adriani and Luca Deidda

MPRA Paper from University Library of Munich, Germany

Abstract: In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Keywords: Market for lemons; Adverse selection; Price dispersion; Price-setting; Signaling; Competition (search for similar items in EconPapers)
JEL-codes: D40 D82 L15 (search for similar items in EconPapers)
Date: 2008
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Related works:
Journal Article: Competition and the signaling role of prices (2011)
Working Paper: Competition and the signaling role of prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16108

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