Abstract

This paper investigates a dynamic model of price signaling for a credence product of unknown social performance. A new entrant uses prices to reveal social responsibility and uphold reputability through-out a learning phase. In equilibrium, the signaling strategy involves penetration or skimming pricing depending on the competitive pres-
sure faced by the entrant. Faced with competition from conventional incumbents, the socially responsible entrant repeatedly charges low prices to penetrate the market. By contrast, in an untapped market, the socially responsible entrant repeatedly charges high prices to skim the cream o¤ the top of the demand. In both cases, costly signaling
is consistent with Veblen’s law that conspicuous waste is an effective means of reputability.

Practical information