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Signaling Quality in an Oligopoly When Some Consumers Are Informed

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  • Yaron Yehezkel

Abstract

This paper considers a signaling game between two competing firms and consumers. The firms have common private information concerning their qualities, and some of the consumers are informed about the firms' qualities. Firms use prices and uninformative advertising as signals of quality. The model reveals that in the separating equilibrium, prices are first climbing and then declining with the proportion of informed consumers, while the expenditure on uninformative advertising is declining. Firms' profits are highest when the proportion of informed consumers is at an intermediate level. Pooling equilibria exist if the proportion of informed consumers is below a certain threshold.

Suggested Citation

  • Yaron Yehezkel, 2008. "Signaling Quality in an Oligopoly When Some Consumers Are Informed," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 937-972, December.
    • Handle: RePEc:bla:jemstr:v:17:y:2008:i:4:p:937-972
    DOI: 10.1111/j.1530-9134.2008.00201.x
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    References listed on IDEAS

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    1. Linnemer, Laurent, 2002. "Price and advertising as signals of quality when some consumers are informed," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 931-947, September.
    2. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
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    5. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
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    8. Daughety, Andrew F. & Reinganum, Jennifer F., 2007. "Competition and confidentiality: Signaling quality in a duopoly when there is universal private information," Games and Economic Behavior, Elsevier, vol. 58(1), pages 94-120, January.
    9. Philippe Bontems & Valérie Meunier, 2005. "Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations," CIE Discussion Papers 2005-10, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    10. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
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    Cited by:

    1. Leonard J. Mirman & Marc Santugini, 2019. "The Informational Role of Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 606-629, April.
    2. Helmut Bester & Juri Demuth, 2015. "Signalling Rivalry and Quality Uncertainty in a Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 15(2), pages 135-154, June.
    3. P. Vanin, 2009. "Competition, Reputation and Cheating," Working Papers 683, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Vaccari, Federico, 2023. "Competition in costly talk," Journal of Economic Theory, Elsevier, vol. 213(C).
    5. Schmidbauer, Eric & Lubensky, Dmitry, 2018. "New and improved?," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 26-48.
    6. Reme Bjørn-Atle, 2019. "Competition in Markets with Quality Uncertainty and Network Effects," Review of Network Economics, De Gruyter, vol. 18(4), pages 205-242, December.
    7. Vaccari, Federico, 2021. "Competition in Signaling," MPRA Paper 106071, University Library of Munich, Germany.
    8. Celik, Levent, 2016. "Competitive provision of tune-ins under common private information," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 113-122.
    9. Eric Schmidbauer, 2016. "New and Improved?," Working Papers 2016-02, University of Central Florida, Department of Economics.
    10. P. Vanin, 2009. "Competition, Reputation and Compliance," Working Papers 682, Dipartimento Scienze Economiche, Universita' di Bologna.
    11. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.
    12. Buehler, Benno & Schuett, Florian, 2014. "Certification and minimum quality standards when some consumers are uninformed," European Economic Review, Elsevier, vol. 70(C), pages 493-511.
    13. Eric Schmidbauer, 2013. "New and Improved?," Working Papers 2013-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    14. Candel-Sánchez, Francisco & Perote-Peña, Juan, 2024. "How does corporate altruism affect oligopolistic competition?," Economic Modelling, Elsevier, vol. 135(C).
    15. Fulan Wu, 2017. "Signaling Unobservable Quality Choice through Price and Advertising: The Case with Competing Firms," Manchester School, University of Manchester, vol. 85(2), pages 243-260, March.
    16. Henze, B., 2016. "Laboratory experiments on the regulation of European network industries," Other publications TiSEM b18fcfca-2b95-4b01-91e2-0, Tilburg University, School of Economics and Management.
    17. Minghua Chen & Konstantinos Serfes & Eleftherios Zacharias, 2023. "Prices as signals of product quality in a duopoly," International Journal of Game Theory, Springer;Game Theory Society, vol. 52(1), pages 1-31, March.

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