Signalling Rivalry and Quality Uncertainty in a Duopoly

Bester, Helmut and Demuth, Juri (May 2013): Signalling Rivalry and Quality Uncertainty in a Duopoly. SFB/TR 15 Discussion Paper No. 400

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.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: Quality uncertainty, Signalling, Oligopoly, Price competition
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A1 - Allokationsmechanismen in Organisationen und Märkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D43, D82, L15
• Language: English