Pricing under noisy signaling

Pricing under noisy signaling We provide rationale, conditions, and insights for “customized” pricing in markets, that is, for equilibria where different buyers pay different prices for similar products. We use a Spence/Riley signaling model enhanced by a signaling methodology under random relations between costs and attributes, developed by Feldman (Math Soc Sci 48:93–101, 2004) and Feldman and Winer (Math Soc Sci 48:81–91, 2004). Examples include markets for new cars, retail, human capital, trades where transaction costs are negotiable, and transactions where sellers affect buyers’ costs by offering different levels of service or support for the same products and prices. These encompass a large fraction of all assets, prices, and transactions. Our results help explain the different levels of segmentation and product/service differentiation that we observe in markets and the efficiency of these equilibria. We note that we can demonstrate the results within competitive sellers’ markets. Financial markets examples include dividend, initial public offerings, market microstructure and capital structure signaling, and share class distinctions in mutual funds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals
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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0442-8
Publisher site
See Article on Publisher Site

Abstract

We provide rationale, conditions, and insights for “customized” pricing in markets, that is, for equilibria where different buyers pay different prices for similar products. We use a Spence/Riley signaling model enhanced by a signaling methodology under random relations between costs and attributes, developed by Feldman (Math Soc Sci 48:93–101, 2004) and Feldman and Winer (Math Soc Sci 48:81–91, 2004). Examples include markets for new cars, retail, human capital, trades where transaction costs are negotiable, and transactions where sellers affect buyers’ costs by offering different levels of service or support for the same products and prices. These encompass a large fraction of all assets, prices, and transactions. Our results help explain the different levels of segmentation and product/service differentiation that we observe in markets and the efficiency of these equilibria. We note that we can demonstrate the results within competitive sellers’ markets. Financial markets examples include dividend, initial public offerings, market microstructure and capital structure signaling, and share class distinctions in mutual funds.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 26, 2014

References

  • Reversal of fortune dividend signaling and the disappearance of sustained earnings growth
    DeAngelo, H; DeAngelo, L; Skinner, DJ
  • Signaling and the valuation of unseasoned new issues
    Downes, DH; Heinkel, R

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