Signaling quality through price guarantee window for technology-related products

Abstract

We study a firm producing and selling a technology-related product with asymmetric quality information to a destination market in two periods. A characteristic of the technology-related product is that its prevailing price may reduce throughout the product’s life cycle and therefore trigger the firm’s price guarantee window. We develop a two-period dynamic signaling game model in which the firm with knowledge of the product quality first decides on the price guarantee window, and then determines the price discount coefficient. We show that quality information disclosure may reduce a high-quality firm’s price guarantee window in which a high-quality firm actively disclosing product quality information can set a shorter price guarantee window to reduce the operating costs. In equilibrium, a high-quality firm would benefit from quality information disclosure but a low-quality firm would be worse off. Quality information disclosure may increase (decrease) a high-quality firm’s first-period sales volume and induce (discourage) more consumers to purchase as early as possible when the quality difference is low (high).