Price Signaling with Salient-thinking Consumers
29 Pages Posted: 19 Nov 2019 Last revised: 3 Jun 2021
Date Written: June 3, 2021
This paper studies the signaling role of prices in a context of salient thinking. Consumers cannot directly observe product quality and their attention can be directed towards the product attribute - quality or price - that stands out in the market. Our analysis shows that separation is less likely to occur when the salience bias is high. We also show that salience, rather than a signaling motive, may explain high prices, whereas even low prices, when deflated by salience, may signal quality. This contrasts with the conventional wisdom that a high price signals superior quality.
Keywords: Salient thinking, Price signaling, Separating equilibria
JEL Classification: D82, D83, D90, L15
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