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Signalling Rivalry and Quality Uncertainty in a Duopoly

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  • Bester, Helmut
  • Demuth, Juri

Abstract

This paper considers price competition in a duopoly with quality uncertainty. The established firm (the `incumbent') offers a quality that is publicly known; the other firm (the `entrant') offers a new good whose quality is not known by some consumers. The incumbent is fully informed about the entrant's quality. This leads to price signalling rivalry because the incumbent gains and the entrant loses if observed prices make the uninformed consumers more pessimistic about the entrant's quality. When the uninformed consumers' beliefs satisfy the `intuitive criterion' and the `unprejudiced belief refinement', prices signal the entrant's quality only in a two-sided separating equilibrium and are identical to the full information outcome.

Suggested Citation

  • Bester, Helmut & Demuth, Juri, 2013. "Signalling Rivalry and Quality Uncertainty in a Duopoly," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 400, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:400
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Vaccari, Federico, 2023. "Competition in costly talk," Journal of Economic Theory, Elsevier, vol. 213(C).
    2. Vaccari, Federico, 2021. "Competition in Signaling," MPRA Paper 106071, University Library of Munich, Germany.
    3. Fulan Wu, 2014. "Entry And Quality Signaling When The Incumbent Is Informed Of The Entrant'S Quality," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 59(05), pages 1-16.
    4. Vida, Péter & Honryo, Takakazu, 2021. "Strategic stability of equilibria in multi-sender signaling games," Games and Economic Behavior, Elsevier, vol. 127(C), pages 102-112.
    5. 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.
    6. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.

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    More about this item

    Keywords

    Quality uncertainty; Signalling; Oligopoly; Price competition;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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