Economics Research Seminar Series: Joao Montez

Signaling new model quality with old models: delist or discount? Prof. Joao Montez, HEC Lausanne. 

We study the price and product line decisions of a seller that introduces a new model, which can be either a significant (high quality) or a mild improvement over an old model of known quality. A fraction of consumers are uninformed about the new product’s quality. As this fraction increases, in a separating equilibrium, i) the high-quality model is first offered at a distorted premium over the old model, and the latter is offered at its full information price level; ii) the high-quality distorted premium becomes then constant but the old model is discounted; iii) finally, the old model is delisted, and the new model price may or not be distorted from its full information single product price level.

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