Price as a quality signal in a strategic competition context: The role of a disclosure law

This paper analyses a firm's incentive to use price as a signal of quality in a duopoly competition, even though she can credibly and costlessly disclose her true quality. When a firm sets a higher price to signal higher quality, it has strategic effects on the price chosen by her rival. This could result in higher equilibrium prices and profits. Hence, a mandatory disclosure law is useful to prevent the practice of using of higher price as a device to signal higher quality, and in turn equilibrium prices would be lower. From a welfarist point of view, this argument justifies the establishment of such disclosure law.JEL Classification: D43, D82, K29I would like to thank Dolors Berga, Nicolas Boccard, Ramon Caminal, Carmen Matutes, José Luis Moraga and Ricard Torres for their useful comments. This paper has benefited from the comments of two anonymous referees. All the surviving mistakes are mine. Financial support from SEC2001-2793-C03-03 is gratefully acknowledged.