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Introductory Price as a Signal of Cost in a Model of Repeat Business

Kyle Bagwell
The Review of Economic Studies
Vol. 54, No. 3 (Jul., 1987), pp. 365-384
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297564
Page Count: 20
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Introductory Price as a Signal of Cost in a Model of Repeat Business
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Abstract

A two-period game between firms and consumers is considered. Firms are privately informed about their individual costs, and consumers must pay a search cost in order to learn a firm's current price. Consumers thus have incentive to use introductory price as a signal of cost and, hence, second period price. Recent refinements of the sequential equilibrium concept are employed, and the resulting equilibria involve low introductory prices (introductory sales).

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