Marc Santugini

Information in Cournot: Signaling with incomplete control

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.

Noisy Signaling in Monopoly

We study the informational role of prices in a stochastic environment. We provide a closed-form solution of the monopoly problem when the price imperfectly signals quality to the uninformed buyers. We then study the effect of noise on output, market price, information flows, and expected profits. The presence of noise may reduce the informational externality due to asymmetric information, which increases the firms expected profits.

Learning and Technological Progress in Dynamic Games

We study investment and consumption decisions in a dynamic game under learning. To that end, we present a model in which agents not only extract a resource for consumption but also invest in technology to improve the future stock. At the same time, the agents learn about the stochastic process governing the evolution of public capital, including the effect of investment in technology on future stock. Although the characterization of a dynamic game with Bayesian dynamics (and without the assumption of adaptive learning) is generally intractable, we characterize the unique symmetric Bayesian-learning recursive Cournot–Nash equilibrium for any finite horizon and for general distributions of the random variables. We also show that the limits of the equilibrium outcomes for a finite horizon exist. The addition of learning to a stochastic environment is shown to have a profound effect on the equilibrium.

Learning in a Perfectly Competitive Market

We study learning in perfect competition. A price-taking firm sells a good whose quality is unknown to some buyers. The uninformed buyers use the price to infer information about quality. The presence of noise on the supply prevents perfect learning. Even though the firm is a price-taker, information is disseminated though the price. The shape of the supply curve influences the amount of information contained in the price, which, in turn, affects the competitive equilibrium through the learning process of the uninformed buyers.

The Informational Role of Prices

We study the informational role of prices. To that end, we consider the framework of a dominant firm with a competitive fringe. When the competitive fringe is large enough, there exists a unique fully revealing equilibrium, in which the price conveys full information about the quality of the good to uninformed buyers. Deceiving the uninformed buyers by charging a high price and mimicking a high quality is not profitable when the competitive fringe is large enough. Since a higher price triggers more sales on the part of the competitive fringe, residual demand and thus profits are reduced. We also study the effect of asymmetric information and learning on the equilibrium outcomes. More uninformed buyers increases the price, reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe.

Noisy Learning in a Competitive Market with Risk Aversion

We address the issue of risk aversion in a competitive equilibrium when some buyers engage in learning and information is conveyed through the price system. Specifically, since the learning process yields uncertainty, we study the effect of risk aversion on the equilibrium outcomes of the model, including the amount of information released by the market. We show that risk aversion has an effect on the market outcomes but not on the flow of information. In particular, an increase in risk aversion lowers the competitive price and quantity. However, an increase in risk aversion does not change the amount of information embedded in the equilibrium price.

The Informational Benefit of Price Discrimination

We consider a monopoly supplying a homogeneous good to two separate markets with different demands. In one of the markets, some buyers do not know the quality of the good, but learn about it from observing prices. Under noisy demand, third-degree price discrimination is shown to alter the informational content of the price-signals received by the uninformed buyers. Specifically, discriminatory pricing have informational benefits over uniform pricing, i.e., the posterior beliefs of the uninformed buyers have a smaller bias and a lower variance.

Online Appendix: The Informational Role of Prices

This is the online appendix to The Informational Role of Prices by Leonard J. Mirman and Marc Santugini.

Long-Run Market Configurations in a Dynamic Quality-Ladder Model with Externalities

We analyze the type of market structures that arise in the long-run when quality externalities and asymmetric R&D capabilities exist in the context of a quality-ladder dynamic model. An example of such externalities is a patent release by the leading fi rm: an improvement of quality of this firms good a ects the quality of the other fi rms products. This externality can be thought of as an increase in compatibility in a network. We show that it is possible for this model to generate, in the long-run, multi-modal probability distributions over di fferent market structures from the same parameter values. In some cases, the lagging rm may even become the dominant fi rm depending on the degree of the externality. This may have implications for the estimation and simulation of this class of models.

The income effect under uncertainty: A Slutsky-like decomposition with risk aversion

We study the effect of changing income on optimal decisions in the multidimensional expected utility framework with strongly separable preferences. Using the Kihlstrom and Mirman (1974) (KM) utility representation, we show that the effect of changing income can be decomposed into a modified income effect linked to the classical income effect and an effect representing attitudes to risk, modified by income.