The Informational Role of Prices

37 Pages Posted: 19 Nov 2009 Last revised: 17 Mar 2017

Leonard J. Mirman

University of Virginia - Department of Economics

Marc Santugini

University of Virginia - Department of Economics

Date Written: March 16, 2017

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.

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

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

Suggested Citation

Mirman, Leonard J. and Santugini, Marc, The Informational Role of Prices (March 16, 2017). Available at SSRN: https://ssrn.com/abstract=1508476 or http://dx.doi.org/10.2139/ssrn.1508476

Leonard J. Mirman

University of Virginia - Department of Economics ( email )

1818 Winston Rd
Charlottesville, VA
United States

Marc Santugini (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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