Price Signal

4 Key excerpts on "Price Signal"

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  Essentials of Economics

  • James D Gwartney, Richard Stroup, J. R. Clark(Authors)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  Markets collect and register bits and pieces of information reflecting the choices of consumers, producers, and resource suppliers. This vast body of information, which is almost always well beyond the comprehension of any single individual, is tabulated into a summary statistic— the market price. This summary statistic provides market participants with information on the relative scarcity of products. When weather conditions, consumer preferences, technology, political revolution, or natural disaster alter the relative scarcity of a product or resource, market prices communicate this information to decision-makers. Direct knowl-5 6 PART ONE THE ECONOMIC WAY OF THINKING edge of why conditions were altered is not necessary in order to make the appropriate adjustment. A change in the market price provides sufficient infor-mation to determine whether an item has become more or less scarce. 10 Coordinating the Actions Market prices coordinate the choices of buyers and sellers, bringing their deci-Of Market Participants sions into line with each other. If suppliers are bringing more of a product to market than is demanded by consumers at the market price, that price will fall. As the price declines, producers will cut back their output (some may even go out of business), and simultaneously the price reduction will induce consumers to utilize more of the good. The excess supply will eventually be eliminated, and balance will be restored in the market. Alternatively, if producers are currently supplying less than consumers are purchasing, there will be an excess demand in the market. Rather than do without, some consumers will bid up the price. As the price rises, consumers will be encouraged to economize on their use of the good, and suppliers will be encouraged to produce more of it. Again, price will serve to balance the scales of supply and demand.

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  Industrial Organization

  Markets and Strategies

  • Paul Belleflamme, Martin Peitz(Authors)
  • 2015(Publication Date)
  • Cambridge University Press

    (Publisher)

  The direction of the distortion and the viability of advertising signals depends on costs and the effect of advertising on demand. 12.2.2 Price Signals While so far we have singled out the repeat purchase effect as an explanation for the possibility of signalling, we will now focus on Price Signalling and analyse two single-period models in which price can signal product quality. Before doing so, it is useful to consider a general framework in which demand possibly depends on price p , expected quality s e and true quality s . General framework Suppose that there is a single firm with market power that faces a demand curve Q ( p , s e , s ). f The firm’s profit is ( p − c ( s )) Q ( p , s e , s ). If its quality is low ( s = s L ), denote the full-information profit-maximizing price as p L = arg max p ( p − c ( s L )) Q ( p , s L , s L ). Accordingly, a low-quality firm has no incentive to mimic a high-quality firm if its full-information profit exceeds the profits it can possibly obtain mimicking the behaviour of a high-quality firm, where consumers believe that only high-quality firms set price p . This inequality reads ( p L − c ( s L )) Q ( p L , s L , s L ) ≥ ( p − c ( s L )) Q ( p , s H , s L ) , f We do not explicitly consider other firms in this market, which is admissible if these other firms set prices that are not affected by the actions of the firm under consideration (as would be the case with a competitive fringe that produces at marginal costs) or, trivially, if there is no other firm in the market. 12.2 Advertising and Price Signals 309 if p is the signalling price chosen by a high-quality firm. Denote p H as a solution to ( p L − c ( s L )) Q ( p L , s L , s L ) = ( p H − c ( s L )) Q ( p H , s H , s L ), which may not be uniquely defined. The high-quality firm has to distort its full-information price p H = arg max p ( p − c ( s H )) Q ( p , s H , s H ) if the low-quality firm has an incentive to mimic at this price.

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  Decision Making in Marketing and Finance

  An Interdisciplinary Approach to Solving Complex Organizational Problems

  • P. Koku(Author)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  CHAPTER 4 Signaling in Finance and Marketing

  What is signaling, why is it used, and when is it used in marketing? These are a few questions that usually come up, which we intend to deal with in this chapter. The term “signaling” is used in many disciplines including, but not limited to, finance, economics, marketing, and evolutionary biology. Some scholars have argued that the term originated from evolutionary biology where scientists use it to describe a unique communication between male and female species—insects, animals, birds, and so on. Signals are different from “cues” and are intentionally emitted by the sender to communicate a specific intent. This intent is received by the receiver of the signal. For example, the male frog communicates its readiness to mate by emitting a specific signal to indicate its intent. This intent is understood by a female gray tree frog that receives the signal (Feldhamer et al., 2007). Similarly, peacocks supposedly signal their reproductive fitness with their large colorful tails (Grafen, 1990).

  Signaling has, over the years, made its way into other disciplines including those that are not even remotely related to evolutionary biology. In the social sciences such as economics, finance, and marketing, signaling theory is used to explain communication between agents and principals in a market of information asymmetry (imperfect information), in which the market participants have different information. As in evolutionary biology both the signal sender and the receiver benefit from the signal. Spence in a seminal paper on labor market signaling argued that the labor market works more efficiently when potential productive employees signal their productivity through the “amount” of education they have acquired, even if it is assumed that there is no intrinsic value to education itself (1973).

  Even though the concept of signaling is simple, it is somewhat difficult to fully express in words. This difficulty was expressed by Spence as follows:

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  Workbook in Introductory Economics

  • Colin Harbury(Author)
  • 2014(Publication Date)
  • Pergamon

    (Publisher)

  The forces of supply and demand working through the price mechanism can be thought of as helping to solve the central economic problems of any society. Prices act, as it were, as signals which perform two functions. (i) Prices signal to suppliers the demand for different goods and services. Comparing prices with costs, producers can decide how to allocate resources in order to maximise profits. (ii) Prices signal to buyers the costs of acquiring different goods and services. Comparing prices with the satisfaction that goods bring, buyers can decide how to allocate their expenditure in order to maximize their satisfaction. In changing circumstances, prices act as signals to producers to adjust the allocation of resources. Prices also function to ration a limited supply among those who are prepared to pay most for it. The DEMAND for a commodity is generally thought of as being by 'consumers' (or 'households'). It is rarely for a fixed amount, but is considered as a SCHEDULE of quantities which would be bought in the course of a given period of time at various prices. It is sometimes referred to specifically as the schedule of EFFECTIVE DEMAND to emphasize that it is not mere desires which are relevant but wants backed by preparedness to buy. The relationship between demand and price may be portrayed graphically as a DEMAND CURVE, with price plotted on the vertical axis and the quantity demanded on the horizontal axis. Market demand is made up of the demands of all individual consumers, and there is an observed tendency for demand curves to slope downwards to the right. This may be explained in two ways. First, as price falls, the number of persons entering the market as purchasers tends to increase. Second, as price falls, there is a tendency for each individual consumer to demand more. The second reason is related to the principle of DIMINISHING MARGINAL UTILITY.

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