Price Signaling and Channel Coordination

52 Pages Posted: 2 Apr 2019 Last revised: 4 Apr 2019

See all articles by Ruitong Wang

Ruitong Wang

University of Minnesota - Twin Cities - Carlson School of Management

Yi Zhu

University of Minnesota - Carlson School of Management

Akshay R. Rao

University of Minnesota - Twin Cities - Carlson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2019

Abstract

When information asymmetry exists in the market, firms often use the price signal to communicate unobservable quality to consumers. We examine the signaling role of retail price in a decentralized channel. Our normative model demonstrates that there might exist a moderate range of retail prices (we term this range the “quality suspicion range”) within which consumers cannot perfectly discern quality from the price. In order to credibly communicate high quality to consumers, the retailer is forced to set a price either below or above the quality suspicion range. This handicaps the retailer’s price response to wholesale price. We find that there could exist equilibria such that the wholesale price is relatively low (and the retail price is compelled to be correspondingly low). The low prices reduce channel inefficiency due to the double marginalization. As a result, consumers, retailers and manufacturers might all be better off under imperfect than perfect information.

Keywords: Channel Coordination, Signaling, Pricing, Game Theory

JEL Classification: D82, M31

Suggested Citation

Wang, Ruitong and Zhu, Yi and Rao, Akshay R., Price Signaling and Channel Coordination (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3350466 or http://dx.doi.org/10.2139/ssrn.3350466

Ruitong Wang (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Yi Zhu

University of Minnesota - Carlson School of Management ( email )

321 - 19th Ave. South, Suite 3-150
Minneapolis, MN 55455
United States

Akshay R. Rao

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8049 (Phone)

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