Price and Quality in a New Product Monopoly" (Working Paper E89-8/2

In a signal-extraction model of consumer behaviour, higher prices signal higher-quality pro-ducts 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 incen-tive to provide 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. 1