Signaling quality in an oligopoly when some consumers are informed

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Abstract

This paper considers a signaling game between two competing firms and consumers. The firms have common private information concerning their qualities, and some of the consumers are informed about the firms' qualities. Firms use prices and uninformative advertising as signals of quality. The model reveals that in the separating equilibrium, prices are first climbing and then declining with the proportion of informed consumers, while the expenditure on uninformative advertising is declining. Firms' profits are highest when the proportion of informed consumers is at an intermediate level. Pooling equilibria exist if the proportion of informed consumers is below a certain threshold.

Original languageEnglish
Pages (from-to)937-972
Number of pages36
JournalJournal of Economics and Management Strategy
Volume17
Issue number4
DOIs
StatePublished - Dec 2008

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