Signaling quality through prices in an oligopoly
Firms signal quality through prices even if the market structure is very competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality and each firm's product quality is private information (unknown to consumers and to other firms), there exist symmetric fully revealing perfect Bayesian equilibria where low quality firms randomize over an interval of prices and high quality firms charge high prices. Signaling requires that the market power and rent of low quality firms be large enough and often this requires that high quality firms exercise sufficient market power. There is a unique symmetric fully revealing equilibrium satisfying the D1 criterion; in this equilibrium too, both low and high quality firms may exhibit considerable market power. Market power of high quality firms may persist even as the number of firms becomes arbitrarily large. Every D1 equilibrium involves some revelation of information.
|Keywords||incomplete information, oligopoly, quality, signaling|
|JEL||Oligopoly and Other Forms of Market Imperfection (jel D43), Asymmetric and Private Information (jel D82), Oligopoly and Other Imperfect Markets (jel L13), Information and Product Quality; Standardization and Compatibility (jel L15)|
|Persistent URL||dx.doi.org/10.1016/j.geb.2009.06.001, hdl.handle.net/1765/19988|
Janssen, M.C.W, & Roy, S. (2010). Signaling quality through prices in an oligopoly. Games and Economic Behavior, 68(1), 192–207. doi:10.1016/j.geb.2009.06.001