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Competition and the signaling role of prices

Adriani, Fabrizio and Deidda, Luca Gabriele (2011) Competition and the signaling role of prices. International Journal of Industrial Organization, Vol. 29 (4), p. 412-425. ISSN 0167-7187. Article.

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DOI: 10.1016/j.ijindorg.2010.08.002

Abstract

In a market where sellers are heterogeneous with respect to 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 competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Item Type:Article
ID Code:5542
Status:Published
Refereed:Yes
Uncontrolled Keywords:Market for lemons, adverse selection, price dispersion, price-setting, signaling, competition
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Publisher:Elsevier
ISSN:0167-7187
Copyright Holders:© 2010 Elsevier
Deposited On:04 Mar 2011 17:17

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