High Price Signals High Quality

We examine pricing in markets where products may be of heterogeneous quality and buyers have heterogeneous preferences. The sellers cannot credibly communicate the quality they offer, and consequently price acts as a signal of quality. We determine the equilibria of the model both when the quality is exogenously given, and when the sellers can choose what quality to produce. We single out the unique symmetric equilibrium that satisfies the intuitive criterion. Compared to the bench mark case where quality is observable the price of high-quality goods is higher when quality is not observable but must be inferred from the price