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Price and Quality in a New Product Monopoly

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  • Kenneth L. Judd
  • Michael H. Riordan

Abstract

In a signal-extraction model of consumer behaviour, higher prices signal higher-quality products for a new product monopoly, even without cost asymmetries across different qualities. Moreover, higher-quality products earn greater expected profits, and the monopolist has an incentive to provide even transient improvements in quality. Finally, the monopolist has a positive incentive to conduct market research about quality, and produces more information than is socially optimal.

Suggested Citation

  • Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 773-789.
    • Handle: RePEc:oup:restud:v:61:y:1994:i:4:p:773-789.
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