Prices as signals of quality: experimentation and information acquisition

Abstract

This thesis studies optimal signaling strategies in the presence of social learning and information acquisition. In particular, I consider a monopoly market with asymmetric information in which a firm is privately informed about product quality. Facing initial uncertainty, consumers may not only learn through prices (signaling) but also through social learning and information acquisition. I show that when consumers learn from others, either through word of mouth communication or observational learning, low introductory prices are used as signals of high quality. When, on the other hand, consumers may costly acquire information before purchasing, high prices signal high quality. I finally analyze time on the market as signal of quality when there is only one asset for sale over several periods.