Information in Cournot: Signaling with incomplete control

Abstract

We embed signaling in the classical Cournot model in which several firms sell a homogeneous good. The quality is known to all the firms, but only to some buyers. The quantity-setting firms can manipulate the price to signal quality. Because there is only one price in a market for a homogeneous good, each firm incompletely controls the price-signal through the quantity decision. We characterize the unique signaling Cournot equilibrium in which the price signals quality to the uninformed buyers. We then compare the signaling Cournot equilibrium with the full-information Cournot equilibrium. Signaling is shown to increase the equilibrium price. Moreover, under certain conditions regarding the composition of buyers, the number of firms, and the distribution of costs across firms, the effects of signaling and market externality cancel each other. In other words, the profits under signaling Cournot equal the profits of a cartel in a full-information environment.

The Informational Role of Prices*

“…One important avenue for future research concerns information flows in the Stackelberg framework, in which two strategic firms understand that the price is determined by the market‐clearing condition and that buyers learn about the quality from observing the price. Analyzing information flows in the Stackelberg framework would bridge the gap between the present paper and the information flows in Cournot (Daher et al., )…”

“…One important source of information is market prices. Several studies have provided conditions under which privately held information by firms becomes public through prices, beginning with perfectly competitive markets (Kihlstrom and Mirman, ; Grossman, ; Grossman and Stiglitz, ; Mirman et al., 2014a, 2015) and continuing with imperfectly competitive markets (Wolinsky, ; Riordan, ; Bagwell and Riordan, ; Judd and Riordan, ; Daughety and Reinganum, 1995, 2005, 2007, 2008a,b; Fluet and Garella, ; Hertzendorf and Overgaard, ; Yehezkel, ; Janssen and Roy, ; Daher et al., ). In the case of perfectly competitive markets, firms have no control over prices and thus have no ability to directly influence the amount of information conveyed by them.…”

Pricing an Experience Composite Good as Coordinated Signals

“…Daher et al . () considered a model in which several firms produce homogeneous goods of the same quality. Firms are assumed to share information of the quality that some consumers do not know.…”

Noisy signaling in monopoly

“…In a Cournot model without noise,Daher et al (2012) shows that signaling mitigates the negative effect of the market externality inherent in the Cournot equilibrium on the profits of the firms.…”