Prices as Signals of Quality in Duopoly

This paper studies price signaling in a multi-sender context with two competing firms. Either firm may offer a high or a low quality, but potential customers are, initially, incompletely informed about the quality available at a given outlet. In particular, consumers do not know a priori whether the goods offered are vertically differentiated or homogenous, and, in the latter case, whether they are of high or low quality. We show that fully revealing equilibria are ruled out by a natural equilibrium refinement, whereas partial revelation of information is possible in equilibrium. However, we note that a non-revealing outcome with standard Bertrand-features (pricing at cost) seems likely, whether the goods offered are vertically differentiated or homogenous.Duopoly signaling; Quality uncertainty; Pooling vs. separation