Brown Bag Seminar: Elias Carroni

Signaling quality when consumers are salient thinkers

Elias Carroni, Bologna University

This paper considers a signaling game between two vertically differentiated firms when consumers are salient thinkers and uninformed about the firms’ qualities. Firms can use prices and dissipative advertising as signals of quality. Our analysis reveals that when price is the salient attribute and the salience bias is relevant, the high-quality firm has to resort to both signaling devices. On the contrary, when quality is the salient attribute, price alone is sufficient for signaling quality. Moreover, when the salience bias is relatively high, the asymmetric information problem disappears and prices need not be distorted upwards with respect to the full-information scenario. We also find that the low-quality is never worse off under asymmetric information, whereas the high-quality firm may lose out when consumers are price salient. Finally, we consider quality choice and show that firms maximize product differentiation. Quality becomes the salient attribute and quality levels increase with the salience bias.
(joint work with Andrea Mantovani and Antonio Minniti (University of Bologna)