In 1994, Riordan and Judd constructed a theoretical, signal-extraction model of consumer behavior to examine whether higher prices signal higher-quality products for monopolies introducing a new product. Contrary to the extant literature at the time and without cost asymmetries, they find that higher price can signal higher-quality products for a monopolist selling a new product leading to higher expected profits. The monopolist has a positive incentive to engage in market research regarding product quality.

While these results are a marked change in the previous theoretical results in price-signaling quality, we propose to examine how the Judd and Riordan results are impacted by changes in market structure. When consumers have some private information about product quality, a monopoly attempts to manipulate consumers’ beliefs about its product quality by charging high prices. If two firms independently and simultaneously compete to bring a similar new product to the market, perhaps with the same standards, does either firm have an incentive and / or ability to manipulate consumers’ beliefs about product quality via high price? Similarly, will both firms still have an incentive to conduct market research about quality and will the firms collectively produce more information that is socially optimal?

In exploring these questions, we examine the robustness of Judd and Riordan’s model to changes in market structure.