Econometrica: Mar, 1979, Volume 47, Issue 2

Informational Equilibrium

https://doi.org/0012-9682(197903)47:2<331:IE>2.0.CO;2-K
p. 331-360

John G. Riley

If buyers are less well-informed about product quality than sellers, market prices will reflect average quality. Sellers of high quality products therefore have an incentive to engage in some distinguishing activity which operates as a signal to potential buyers. This paper explores the viability of such signalling or "informational equilibria." It is established that with a continuum of quality levels there is no Nash equilibrium. An alternative non-cooperative equilibrium concept is then developed in which potential price searching agents take account of possible reactions by other agents. It is shown that there is a unique "reactive" informational equilibrium.