High price strategy and quality signalling

Abstract

I investigate a high price strategy by a durable-goods producer for signalling the high quality of goods. It is assumed that two types of monopolists exist: high-quality and low-quality. The monopolist's type is assumed to be unknown to consumers in the first period. Before the beginning of the second period, a product reputation established in the past period enables consumers to recognize the real type of the monopolist. I show that there occurs a signalling equilibrium where the high-quality type monopolist uses a high price strategy. An interaction between the new and old products peculiar to the durable-goods markets plays an important role in the pricing strategy.