I am deeply grateful to my advisor, Julian Wright, for his helpful advice. I wish also to thank the anonymous referee and the editor Klaus Zauner for their valuable comments and suggestions. Any remaining errors are mine alone.
ENTRY AND QUALITY SIGNALLING WHEN ONLY SOME CONSUMERS ARE INFORMED OF THE ENTRANT'S QUALITY
Version of Record online: 4 MAR 2014
© 2014 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
How to Cite
Wu, F. (2014), ENTRY AND QUALITY SIGNALLING WHEN ONLY SOME CONSUMERS ARE INFORMED OF THE ENTRANT'S QUALITY. Bulletin of Economic Research. doi: 10.1111/boer.12026
- Version of Record online: 4 MAR 2014
- quality signalling;
- unprejudiced beliefs;
This paper focuses on competition between an incumbent and an entrant when only the entrant's quality is unknown to (some) consumers. The incumbent may or may not know the entrant's quality. The model reveals a separating equilibrium where the entrant's high price signals its high quality when the proportion of informed consumers is at some intermediate value. The case in which the incumbent knows the entrant's quality generates two additional equilibria. When the proportion of informed consumers is large enough, firms choose their prices as in the complete information case. The entrant's high price in combination with the incumbent's low price signals the entrant's high quality. When the proportion of informed consumers is at some intermediate value, the incumbent's high price signals the entrant's low quality, while its low price signals the entrant's high quality. Interestingly, we find that entry may be facilitated with informational product differentiation.