advertising and prices as signals of quality in a regime of price rivalry abstract this paper addresses the issue of whether firms use price or advertising to signal quality and whether advertising has pro or anti competitive effects we show that when there is price rivalry advertising may be necessary to signal quality in contrast to single firm models signaling through price alone prevails for sufficient inter brand quality differentials joint price advertising signals prevail when the quality differential is small finally advertising in the form of variable rather than fixed costs is shown to increase the feasibility of signaling quality

the informational role of prices we consider a dominant firm with a competitive fringe in order to address the informational role of prices the fringe is necessary for the existence of a unique fully revealing equilibrium in which the price reveals the quality of the good to uninformed buyers a higher price triggers more sales on the part of the competitive fringe reducing both residual demand and profits we find that a larger share of uninformed buyers increases the price reduces the quantity sold by the dominant firm but increases the quantity sold by the competitive fringe this in turn reduces consumer surplus and welfare this article is protected by copyright all rights reserved

information aggregation in common value auctions a key question in information economics and finance is whether prices aggregate information in a competitive environment that is when agents are endowed with private information does competition lead in the limit to prices which would occur if all information were public this paper examines the asymptotic properties of prices in common value auctions when the number of bidders becomes large the main idea in this paper is to separate the issue of information aggregation from the issue of revenue efficiency we also distinguish between the amount of information prices contain and the degree to which prices approximate the asset s value using this approach we get a simple characterization of the limiting distribution of prices we are not only able to answer whether prices converge to the asset s value but also get an explicit form for the limiting distribution prices converge to the expected value of the asset conditional on the information possessed by what we call the pivotal bidder this provides insights on how the auction format and the information structure influence the limiting behavior of prices it shows that the limiting distribution of prices can be derived from the statistical properties of certain order statistics this lets us abstract from the specific equilibrium bidding strategies for example we show that while the first and second price auction have different equilibrium strategies they share a similar limiting distribution of prices these auctions yield different limiting distributions from auctions such as the english auction or kn auction our

signaling quality through prices in an oligopoly firms signal quality through prices even if the market structure is very competitive and price competition is severe in a symmetric bertrand oligopoly where products may differ only in their quality and each firm s product quality is private information unknown to consumers and to other firms there exist symmetric fully revealing perfect bayesian equilibria where low quality firms randomize over an interval of prices and high quality firms charge high prices signaling requires that the market power and rent of low quality firms be large enough and often this requires that high quality firms exercise sufficient market power there is a unique symmetric fully revealing equilibrium satisfying the d1 criterion in this equilibrium too both low and high quality firms may exhibit considerable market power market power of high quality firms may persist even as the number of firms becomes arbitrarily large every d1 equilibrium involves some revelation of information

monopolistic competition with experience goods this paper constructs a model of monopolistic competition where consumers cannot directly verify product quality prior to an initial purchase instead consumers base initial purchases on observed prices which perfectly signal firms qualities both in and out of equilibrium equilibrium quality is less than efficient but generally bounded away from the minimum quality with free entry observable product variety exceeds what would prevail with perfect information as repeat purchases become large relative to initial purchases or as firms become small relative to the size of the market equilibrium product quality rises and the market converges to the full information equilibrium

exchange controls and european stock market integration this paper examines the impact on stock price predictability that the removal of exchange controls had on major european countries during the late 1970s and 1980s it is found that for germany switzerland and france the removal of exchange controls led to an increase in the interdependence between these and other markets in contrast there is little evidence of an increase in interdependence for the uk and italy

the relevance of a choice of auction format in a competitive environment we examine the relevance of an auction format in a competitive environment by comparing uniform and discriminatory price auctions with many bidders in a private values setting we show that if the number of objects for sale is small relative to the number of bidders then all equilibria of both auctions are approximately efficient and lead to approximately the same revenue when the number of objects for sale is proportional to the number of bidders then the particulars of the auction format matter all equilibria of the uniform auction are efficient while all of the equilibria of the discriminatory auction are inefficient the relative revenue rankings of the auction formats can go in either direction depending on the specifics of the environment these conclusions regarding the efficiency and revenue ranking are in contrast to the previous literature which focused on the case of independent information across agents

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

financial deregulation and household saving the last decade has seen widespread domestic financial deregulation in the industrial world particularly in the united states united kingdom and the nordic countries resulting in an increase in competition both between banks and saving institutions thrifts or building societies as they moved into each others services and within each sector this opened up new financial options particularly for households the sector that was probably most affected by government regulation for example there was a significant increase in equity withdrawals from personal housing wealth in both the united kingdom and united states over the ig8os 2 this period also saw a significant change in household consumption behaviour the most dramatic illustration being the fall in the household saving ratio in those countries where the process of deregulation has gone furthest this paper reports the results from estimating a model of household saving using regional data for the united kingdom with a particular emphasis on the interaction between household saving and financial deregulation the estimates are used to calculate the relative importance of different factors in the fall in personal saving over the i98os i conclude that deregulation lowered the equilibrium level of saving over the i98os probably 2 percentage points per annum as well as making saving significantly more dependent on changes in wealth income and real interest rates there have been a number of earlier empirical studies looking at the interaction between financial deregulation and household behaviour manchester and poterba i 989 miles i 992 and koskela et al i 992 present empirical evidence on the interaction between deregulation the housing market and saving in the united states united kingdom and finland respectively others have estimated saving functions which include variables representing the effects of financial deregulation or have considered the impact of financial deregulation on liquidity constraints in consumption 3 the

corporate control in germany the article presents the german system of corporate control compared with the uk the number of listed joint stock companies in germany is relatively low the most important shareholders are companies whereas institutional investors play a minor role an essential feature of german corporate culture is the concept of the interest of the company as a whole and the long term approach in pursuing company goals joint stock companies operate under a two tier structure with a managing board controlled by the supervisory board the body which plays the central role in corporate governance in germany in contrast to what is widely believed german banks do not dominate companies even though they exert considerable influence through industrial holdings supervisory board mandates and proxy voting rights in addition to their regular banking business control via the market is less pronounced here than in the uk but is growing in importance copyright 1992 by oxford university press

output trends in ec countries and the implications for transition to monetary union abstract motivated by the current plan for european monetary unification we explore the degree of shared real per capita output trends among ec countries using johansen s 1988 maximum likelihood approach for estimating long run relations in multivariate vector autoregressive models the evidence is interpreted in favor of the current plan for european economic and monetary union

secrecy and safety we provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness a rational risk neutral consumer s response in a market wherein a firm engages in confidential settlements may be to reduce demand a firm committed to openness incurs higher liability and r d costs though product demand is not diminished we identify conditions such that if the cost of credible auditing to verify openness is low enough a firm prefers to eschew confidentiality

the stock market and exchange rate dynamics abstract this paper articulates a model of the open economy in which as in tobin 1978 the price of shares in the stock market subtitutes for the real interest rate in the determination of aggregate demand the stock market reduces the impact of monetary policy on the real exchange rate indeed if the link between stock prices and aggregate demand is important enough the impact of monetary policy on the real exchange rate can be reversed in contrast with standard dynamic mundell flemming models anticipated fiscal policy can be expansionary rather than contradictionary as in for example burgstaller 1983 blanchard 1984 and branson et al 1985

capital market information and industrial performance the role of west german banks in orthodox theory external capital markets play a dual role supplying various forms of investment finance and disciplining firms which are inefficient or fail to pursue profit goals an extensive literature speaks of the efficiency of external capital markets meaning that firms can make production investment decisions and investors can choose among the securities that represent ownership of firms activities under the assumption that security prices at any time fully reflect all available information fama i970 1 however this concept of efficiency is purely technical it depends critically on what information is available and we know there are problems of appropriability and failure in information markets deriving ultimately from certain peculiarities of information as a commodity arrow i962 thus another growing literature focusses on problems of achieving equilibrium in markets where agents are imperfectly or asymmetrically informed amongst other things this literature shows that informational failures of the kind in question can lead to capital rationing in loan and credit markets and the use of strict collateral requirements as screening devices jaffee and russell i976 stiglitz and weiss i98i cable and turner i983 these may then be expected to affect the efficiency of individual firms and the system as a whole capital shortage implies that some profitable investment opportunities are foregone and production choices may also be distorted by the need to satisfy additional financial constraints contrived to elicit signals of creditworthiness of the firms undertaking them similarly the disciplining role of external capital markets can be impaired by information impactedness williamson i975 and the costs of mobilising and giving effect to shareholders preferences thus in the principal agent framework developed by jensen and meckling i976 and fama i980 the degree of constraint on managerial pursuit of non profit goals as posited by managerial theorists depends on the transactions costs of stock owner intervention the result is an optimal degree of departure from cost minimising profit maximising behaviour determined by the level of transactions costs institutional factors which affect the way information is distributed amongst agents can therefore have an important bearing on allocative and technical efficiency and the west german system of industrial finance provides an in

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

prices as signals of product quality this paper is concerned with the provision of quality in markets in which consumers have only imperfect information the analysis focuses on a market for a product that can be produced at different quality levels all consumers prefer higher to lower quality but they may differ in their willingness to pay for quality producers can produce any quality they like but higher qualities are more costly to produce the information in this market is imperfect in the sense that the exact quality chosen by a firm is known only to the firm itself some information about the quality of a firm s product will however reach its potential customers even if they do not make any special effort to acquire it within the framework suggested here two conclusions are drawn first prices may serve as signals which exactly differentiate the available quality levels that is there exists a fulfilledexpectations equilibrium at which each price signals a unique quality level second the pricesignals are not arbitrary each price signal exceeds the marginal cost of producing the quality it signals such a mark up depends on the nature of the product specific information received by consumers the poorer the information the higher the mark up

price and quality in a new product monopoly in a signal extraction model of consumer behaviour higher prices signal higher quality products for a new product monopoly even without cost asymmetries across different qualities moreover higher quality products earn greater expected profits and the monopolist has an incentive to provide even transient improvements in quality finally the monopolist has a positive incentive to conduct market research about quality and produces more information than is socially optimal

information in cournot signaling with incomplete control abstract we embed signaling in the classical cournot model in which several firms sell a homogeneous good the quality is known to all the firms but only to some buyers the quantity setting firms can manipulate the price to signal quality because there is only one price in a market for a homogeneous good each firm incompletely controls the price signal through the quantity decision we characterize the unique signaling cournot equilibrium in which the price signals quality to the uninformed buyers we then compare the signaling cournot equilibrium with the full information cournot equilibrium signaling is shown to increase the equilibrium price moreover under certain conditions regarding the composition of buyers the number of firms and the distribution of costs across firms the effects of signaling and market externality cancel each other in other words the profits under signaling cournot equal the profits of a cartel in a full information environment

output the stock market and interest rates this paper develops a simple model of the determination of output the stock market and the term structure of interest rates the model is an extension of the is lm model and borrows from it the assumption that output is determined by aggregate demand and that the price level can only adjust over time to its equilibrium value however whereas the is lm emphasizes the interaction between the interest rate and output this model emphasizes the interaction between asset values and output asset values rather than the interest rate are the main determinants of aggregate demand and output current and anticipated output and income are in turn the main determinants of asset values it is this interaction that the model intends to capture its goal is to characterize the joint response of asset values and output to changes in the environment such as changes or announcement of changes in monetary and fiscal policy as the above brief description makes clear anticipations are central to the story the assumption made in this paper will be one of rational expectations the paper is organized as follows section i describes the model and sections ii iv characterize the behavior of the economy under the extreme but convenient assumption that prices are fixed forever sections v and vi extend the analysis to the case where prices adjust over time to their equilibrium value

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

competition and confidentiality signaling quality in a duopoly when there is universal private information abstract we model non cooperative signaling by two firms that compete over a continuum of consumers assuming each consumer has private information about the intensity of her preferences for the firms respective products and each firm has private information about its own product s quality we characterize a symmetric separating equilibrium in which each firm s price reveals its respective product quality we show that the equilibrium prices the difference between those prices the associated outputs and profits are all increasing functions of the ex ante probability of high safety if horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known thus while signaling imposes a distortionary loss on a monopolist using price to signal quality duopolists may benefit from the distortion as it can reduce competition finally average quality is lower since signaling quality redistributes demand towards low quality firms

product safety liability r d and signaling the authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification the firm first engages in rd injuries lead to losses which are allocated by the liability system the authors vary the liability system s allocation of losses and trace out the implications for r d investment and the price safety relationship copyright 1995 by american economic association

output consumption and the stock market implications for european convergence this paper investigates the nature of the relationship between output and stock prices and consumption and stock prices with respect to the different financial structures that exist primarily in the european union eu evidence is found of a long run relationship for both relationships with the exception of germany and to an extent france which is argued is due to their bank dominated financial systems kalman filter estimates reveal that both relationships have increased in strength although little evidence is found of any convergence in the strength of the relationship across the eu

sterling s relationship with the dollar and the deutschemark 1976 89 this paper evaluates the linkages between bilateral exchange rates using a time varying parameter model which can be estimated using the kalman filter the technique solves many of the statistical problems which arise when ordinary least squares is used to estimate currency correlation applying the technique to the dollar sterling dm sterling and dm dollar bilateral exchange rates the results suggest a market weakening strengthening of sterling s relationship with the dollar dm since the mid 1970s additionally these currency linkages are shown to have undergone a number of regime shifts suggesting that the timing of the weakening of the dollar sterling relationship is different to that proposed by previous studies copyright 1991 by royal economic society

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral