Competition and the signaling role of prices

TitleCompetition and the signaling role of prices
Publication TypeWorking Paper
Year of Publication2010
AuthorsF. Adriani, LG. Deidda
Number2010_12
Keywordsadverse selection, competition, market for lemons, price dispersion, price- setting, signaling
Abstract

In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers’ chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Citation Key2730
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