Pricing under noisy signaling

David Feldman, Charles Trzcinka, Russell S. Winer

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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.

Original languageEnglish
Article numberA007
Pages (from-to)435-454
Number of pages20
JournalReview of Quantitative Finance and Accounting
Volume45
Issue number2
DOIs
StatePublished - 1 Aug 2015
Externally publishedYes

Keywords

  • Asymmetric information
  • Capital structure
  • Dividends
  • Initial public offerings
  • Pricing
  • Signaling

ASJC Scopus subject areas

  • Accounting
  • General Business, Management and Accounting
  • Finance

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