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Journal of Industry, Competition and Trade

, Volume 15, Issue 2, pp 135–154 | Cite as

Signalling Rivalry and Quality Uncertainty in a Duopoly

  • Helmut Bester
  • Juri Demuth
Article

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.

Keywords

Quality uncertainty Signalling Oligopoly Price competition 

JEL Classification

D43 D82 L15 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of EconomicsFree University BerlinBerlinGermany

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