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Prices, Product Qualities and Asymmetric Information: The Competitive Case

Prices, Product Qualities and Asymmetric Information: The Competitive Case Abstract Recent developments in the economics of information emphasize the informational content of prices. We examine the degree to which prices convey information on product quality to uninformed agents. Under perfect competition, we show that a rational expectations equilibrium may not exist. When an equilibrium does exist, the information on quality conveyed by prices depends on the shape of the average cost curves and the relative numbers of informed and uniformed agents. This content is only available as a PDF. Author notes This essay is adapted from parts of Cooper-Ross (1983). We would like to thank Costas Azariadis, John Bigelow, David Cass, Joseph Farrell, Sanford Grossman, Oliver Hart, Paul Milgrom, Mike Peters, Andy Postlewaite and Pablo Spiller for helpful comments. The useful comments and suggestions made by a pair of anonymous referees and the participants of several workshops are also gratefully acknowledged. All remaining errors are our own. After completing an earlier draft of this paper, we became aware of the related work of Farrell (1982) whose model is similar to the one in Section 3 of this paper. Financial assistance from Richard D. Irwin Foundation, the Economics Research Unit at the University of Pennsylvania and from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. © 1984 The Society for Economic Analysis Limited http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Prices, Product Qualities and Asymmetric Information: The Competitive Case

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References (14)

Publisher
Oxford University Press
Copyright
© 1984 The Society for Economic Analysis Limited
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2297687
Publisher site
See Article on Publisher Site

Abstract

Abstract Recent developments in the economics of information emphasize the informational content of prices. We examine the degree to which prices convey information on product quality to uninformed agents. Under perfect competition, we show that a rational expectations equilibrium may not exist. When an equilibrium does exist, the information on quality conveyed by prices depends on the shape of the average cost curves and the relative numbers of informed and uniformed agents. This content is only available as a PDF. Author notes This essay is adapted from parts of Cooper-Ross (1983). We would like to thank Costas Azariadis, John Bigelow, David Cass, Joseph Farrell, Sanford Grossman, Oliver Hart, Paul Milgrom, Mike Peters, Andy Postlewaite and Pablo Spiller for helpful comments. The useful comments and suggestions made by a pair of anonymous referees and the participants of several workshops are also gratefully acknowledged. All remaining errors are our own. After completing an earlier draft of this paper, we became aware of the related work of Farrell (1982) whose model is similar to the one in Section 3 of this paper. Financial assistance from Richard D. Irwin Foundation, the Economics Research Unit at the University of Pennsylvania and from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. © 1984 The Society for Economic Analysis Limited

Journal

The Review of Economic StudiesOxford University Press

Published: Apr 1, 1984

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