Shane Parendo, Cheng-Zhong Qin
Author information
Department of Economics, University of California, Santa Barbara, CA 93106, USA
E-mail: sparendo@econ.ucsb.edu (Shane Parendo), qin@econ.ucsb.edu( Cheng-Zhong Qin)
This paper analyzes the role of price as a signal of the quality of a monopoly firm's new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).
separating equilibrium , price distortion , signaling game
Shane Parendo, Cheng-Zhong Qin. Signaling Product Quality by Price. Front Econ Chin, 2012, 7(3): 363‒372 https://doi.org/10.3868/s060-001-012-0016-1