Price and Quality in a New Product Monopoly.

In a single-extraction model of consumer behavior, higher prices signal higher-quality products for a new product monopoly, even without cost asymmetries across different qualities. Moreover, higher-quality products earn greater expected profits and the monopolist has an incentive to produce even transient improvements in quality. Finally, the monopolist has a positive incentive to conduct market research about quality and produces more information than is socially optimal. Copyright 1994 by The Review of Economic Studies Limited.