PRICING TO SIGNAL PRODUCT LINE QUALITY

This paper offers a general characterization of the optimal product line prices for a monopolist whose quality of products is initially unknown to consumers. In the focal equilibrium, a monopolist signals a high-quality product line by pricing as if quality were known to be high, but costs of production were higher than they truly are. In a rich set of environments, this characterization implies that the prices of all products are initially distorted upward, with the price distortion being largest for products with the most inelastic demands and/or quality-sensitive production costs. These implications yield predictions for the time path of prices flint are broadly consistent with evidence from the marketing literature. The multidimensional signaling problem is made tractable by the satisfaction of a very simple and powerful single crossing property.