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Full Access Signaling Product Quality by Price

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Signaling Product Quality by Price

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This paper analyzes the role of price as a signal of the quality of amonopoly firm’s new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).


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