Competitive signalling

With imperfect information about product quality there are incentives for buyers to make use of proxy variables as “signals”, and hence for sellers to invest in the activity of signalling. Received theory suggests that there are plausible circumstances under which there exist a whole family of potential “signalling equilibria” each of which successfully distinguish quality differences.In this paper it is shown that from the family of “equilibria” only one, the Pareto-dominant member, survives plausible experimentation by buyers. With moderately more sophisticated experimentation it is further shown that there is no competitive equilibrium.