Abstract

http://ssrn.com/abstract=1508476
 
 

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The Informational Role of Prices


Leonard J. Mirman


University of Virginia - Department of Economics

Marc Santugini


HEC Montreal, Institute of Applied Economics; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE)

April 7, 2014


Abstract:     
We study the informational role of prices. To that end, we consider the framework of a dominant firm with a competitive fringe. When the competitive fringe is large enough, there exists a unique fully revealing equilibrium, in which the price conveys full information about the quality of the good to uninformed buyers. Deceiving the uninformed buyers by charging a high price and mimicking a high quality is not profitable when the competitive fringe is large enough. Since a higher price triggers more sales on the part of the competitive fringe, residual demand and thus profits are reduced. We also study the effect of asymmetric information and learning on the equilibrium outcomes. More uninformed buyers increases the price, reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe.

Number of Pages in PDF File: 41

Keywords: Asymmetric information, Dominant Firm with Fringe Competition, Informational externality, Learning quality, Signaling

JEL Classification: D21, D42, D82, D83, D84, L12, L15

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Date posted: November 19, 2009 ; Last revised: April 8, 2014

Suggested Citation

Mirman, Leonard J. and Santugini, Marc, The Informational Role of Prices (April 7, 2014). Available at SSRN: http://ssrn.com/abstract=1508476 or http://dx.doi.org/10.2139/ssrn.1508476

Contact Information

Leonard J. Mirman
University of Virginia (UVA) - Department of Economics ( email )
P.O. Box 400182
114 Rouss Hall
Charlottesville, VA 22904-4182
United States
434-924-6756 (Phone)
434-982-2904 (Fax)
Marc Santugini (Contact Author)
HEC Montreal, Institute of Applied Economics ( email )
3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE) ( email )
Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada
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