Delegated Selling and Intermediated Signaling
37 Pages Posted: 21 Jan 2023
Asymmetric information about product quality can create incentives for a privately informed manufacturer to sell to uninformed consumers through a retailer and to maintain secrecy of upstream pricing. By delegating retail price setting to an intermediary the manufacturer can hide information about product quality, prevent double marginalization and avoid signaling distortions associated with direct selling. For intermediated signaling games of this sort, we outline a notion of equilibrium refinement that is motivated by considerations similar to the Intuitive Criterion for standard signaling games and show that under delegated selling pooling outcomes are consistent with the new refinement. Expected profit, consumer surplus and social welfare can all be higher with delegated selling. However, if secrecy of upstream pricing cannot be maintained, selling through a retailer can only lower the expected profit of the manufacturer.
Keywords: Asymmetric Information, Product Quality, Delegation, Intermediary, Signaling
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