Prices as Signals of Product Quality in a Duopoly

29 Pages Posted: 30 Jun 2020 Last revised: 9 Mar 2021

See all articles by Minghua Chen

Minghua Chen

affiliation not provided to SSRN

Konstantinos Serfes

Drexel University

Eleftherios Zacharias

affiliation not provided to SSRN

Date Written: June 7, 2020

Abstract

In a duopoly model of horizontal and vertical differentiation, where consumers are ex-ante unaware of product qualities, we study the firms' incentives to signal quality via prices. Consumers, after they observe prices, can evaluate a firm's product quality before purchase if they incur a search cost. We show that a complete information (undistorted) separating equilibrium and a unique pooling equilibrium (in pure strategies) exist. A lower search cost moves the market equilibrium from pooling to separating and induces a mean-preserving spread in the distribution of the equilibrium prices.

Keywords: Consumer search, Product quality, Signaling

Suggested Citation

Chen, Minghua and Serfes, Konstantinos and Zacharias, Lefteris, Prices as Signals of Product Quality in a Duopoly (June 7, 2020). Available at SSRN: https://ssrn.com/abstract=3621466 or http://dx.doi.org/10.2139/ssrn.3621466

Minghua Chen

affiliation not provided to SSRN

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

Lefteris Zacharias

affiliation not provided to SSRN

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