Signalling rivalry and quality uncertainty in a duopoly

Abstract

This paper considers a market in which only the incumbent’s quality is publicly known. The entrant’s quality is observed by the incumbent and some fraction of informed consumers. This leads to price signalling rivalry between the duopolists, because the incumbent gains and the entrant loses when 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’, only a two–sided separating equilibrium can exist and prices are identical to the full information outcome.