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Perpetual signaling with imperfectly correlated costs

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  • Loretta J. Mester

Abstract

In many imperfect-information models in industrial organization, a firm is induced to take an action that does not maximize its first-period profit because other firms view this action as a signal about the firm's private information. In these models, because the opponent firms can correctly invert the firm's strategy, all information is revealed after play in the first period, and in subsequent periods all firms play their single-period profit-maximizing strategies. Thus, behavior like limit pricing is observed only in the first period, and not in any subsequent period. The empirical importance of such signalling behavior, however, depends on its being perpetuated through time rather than being a single-period phenomenon. In this article, such perpetual signalling is obtained by allowing the variable about which firms have private information to vary through time. In a separating equilibrium, while a firm's action will perfectly reveal its private information in a period, it will not perfectly reveal the firm's private information in subsequent periods. Thus, the incentive to signal perpetuates through time.
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Suggested Citation

  • Loretta J. Mester, 1990. "Perpetual signaling with imperfectly correlated costs," Working Papers 90-13, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:90-13
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    Cited by:

    1. Flavio Toxvaerd, 2017. "Dynamic limit pricing," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 281-306, March.
    2. David Spector, 2021. "Market share transparency, signaling and welfare: Cournot and Bertrand," Working Papers halshs-02946654, HAL.
    3. Paolo Coccorese & Alfonso Pellecchia, 2009. "Multimarket Contact and Profitability in Banking: Evidence from Italy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(3), pages 245-271, June.
    4. Ahmet Faruk Aysan & Mustafa Disli & Koen Schoors, 2013. "Bank Competition and Outreach: Evidence from Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S5), pages 7-30, November.
    5. Pham, Tho & Talavera, Oleksandr & Yang, Junhong, 2016. "Multimarket Competition and Profitability: Evidence from Ukrainian banking," MPRA Paper 72376, University Library of Munich, Germany.
    6. Harrington, Joseph E., 2021. "There may be no pass through of a merger-related cost efficiency," Economics Letters, Elsevier, vol. 208(C).
    7. Doris Neu Berger, 1998. "Industrial Organization of Banking: A Review," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 97-118.
    8. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    9. Shaffer, Sherrill, 2004. "Patterns of competition in banking," Journal of Economics and Business, Elsevier, vol. 56(4), pages 287-313.
    10. Neuberger, Doris, 1997. "Structure, Conduct and Performance in Banking Markets," Thuenen-Series of Applied Economic Theory 12, University of Rostock, Institute of Economics.
    11. Coccorese, Paolo & Pellecchia, Alfonso, 2013. "Multimarket contact, competition and pricing in banking," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 187-214.

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    Keywords

    Corporations; Bank competition;

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