Low prices cum selective distribution versus high prices: how best to signal quality?

Nada Ben Elhadj (1) , Didier Laussel (2)

1 ISG - Institut Supérieur de Gestion de Tunis [Tunis]
2 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

We investigate the best signalling strategy for a monopoly introducing a new product with unobservable quality when second-period sales are linked to first-period ones and the firm may tailor its distribution network to exclude some consumers. When producing a high quality product rather than a low quality one is relatively costly with respect to the increase in quality, optimal signalling is by price alone. But when the cost differential is lower, it will be optimal to set a low first-period price, not to serve all would-be consumers at this price (selective distribution) and raise the price afterwards. Paradoxically, this strategy allows a larger customer base to be reached than in the case of pure price signalling.

Keywords: Quality signal; Selective distribution; Price signal; Increasing; Decreasing cost of quality

Domains: Quantitative Finance [q-fin]; Humanities and Social Sciences

Nada Ben Elhadj, Didier Laussel. Low prices cum selective distribution versus high prices: how best to signal quality?. Applied Economics, 2017, 49 (44), pp.4440 - 4459. ⟨10.1080/00036846.2017.1284988⟩. ⟨hal-01658369⟩