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Low price signals high capacity

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Listed:
  • Klaus Kultti
  • Eeva Mauring

Abstract

We study pricing in a model where buyers are homogeneous and sellers have either capacity one or two. We show that if buyers observe prices but not capacities then an equilibrium exists where sellers of capacity two post lower prices than sellers of capacity one. The equilibrium satisfies the intuitive criterion. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Klaus Kultti & Eeva Mauring, 2014. "Low price signals high capacity," Journal of Economics, Springer, vol. 112(2), pages 165-181, June.
    • Handle: RePEc:kap:jeczfn:v:112:y:2014:i:2:p:165-181
    DOI: 10.1007/s00712-013-0355-3
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    References listed on IDEAS

    as
    1. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
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    3. Godenhielm Mats & Kultti Klaus, 2015. "Directed Search with Endogenous Capacity," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 15(2), pages 211-249, July.
    4. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    5. Guido Menzio, 2007. "A Theory of Partially Directed Search," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 748-769, October.
    6. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-1059, October.
    7. Shouyong Shi, 2002. "Product Market and the Size-Wage Differential," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 21-54, February.
    8. Roberts, Mark J. & Supina, Dylan, 1996. "Output price, markups, and producer size," European Economic Review, Elsevier, vol. 40(3-5), pages 909-921, April.
    9. Lester, Benjamin, 2010. "Directed search with multi-vacancy firms," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2108-2132, November.
    10. Kultti Klaus, 2011. "Sellers Like Clusters," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-28, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Prices; Capacity; Signalling; D24; D82;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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