Competition and the Signaling Role of Prices

50 Pages Posted: 7 Jun 2006

See all articles by Fabrizio Adriani

Fabrizio Adriani

SOAS University of London

Luca Deidda

Università degli Studi di Sassari - Department of Economics and Business; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Date Written: April 2006

Abstract

In a market where sellers are endowed with heterogeneous qualities of the same good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study under what conditions and to what extent sellers of high quality goods are able to overcome such a need for communication by means of pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. The unique robust equilibrium outcome - in terms of prices, quantities and qualities traded - depends upon market conditions. If demand is strong so that sellers face weak competitive pressure, sellers of high quality goods are able to use prices as a signaling device and this enables them to trade. However, not all sellers of high quality are ex-post able to sell. In particular, if demand is sufficiently strong, high quality sellers become rationed. If demand is weak, competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Keywords: Adverse Selection, Market for lemons, Price

JEL Classification: D4, D8, L15

Suggested Citation

Adriani, Fabrizio and Deidda, Luca, Competition and the Signaling Role of Prices (April 2006). Available at SSRN: https://ssrn.com/abstract=906833 or http://dx.doi.org/10.2139/ssrn.906833

Fabrizio Adriani

SOAS University of London ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

Luca Deidda (Contact Author)

Università degli Studi di Sassari - Department of Economics and Business ( email )

via Muroni 25
Sassari, Sassari 07100
Italy

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
56
Abstract Views
748
rank
460,922
PlumX Metrics