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Prices as signals of product quality in a duopoly

Author

Listed:
  • Minghua Chen

    (Research Institute of Economics and Management, Southwestern University of Finance and Economics)

  • Konstantinos Serfes

    (Drexel University)

  • Eleftherios Zacharias

    (Athens University of Economics and Business)

Abstract

In a duopoly model of horizontal and vertical differentiation, where consumers are ex-ante unaware of product qualities, we study the firms’ incentives to signal quality via prices. Consumers, after they observe prices, can evaluate a firm’s product quality before purchase if they incur a search cost. We show that a complete information (undistorted) separating equilibrium and a unique pooling equilibrium (in pure strategies) exist. A lower search cost moves the market equilibrium from pooling to separating and induces a mean-preserving spread in the distribution of the equilibrium prices.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jogath:v:52:y:2023:i:1:d:10.1007_s00182-022-00808-1
    DOI: 10.1007/s00182-022-00808-1
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    References listed on IDEAS

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