Pricing an Experience Composite Good as Coordinated Signals

In this paper, we consider an experience composite good, each of whose components is produced by independent firms sharing the information about the quality. We obtain two main results. First, if the production costs are equal across qualities, the undistorted equilibrium is the unique unprejudiced separating equilibrium. Furthermore, in a pooling equilibrium, low‐type firms are able to coordinate their prices upwards to be pooled with high‐type firms. Second, if the production costs differ across qualities, no (universally divine) pooling equilibrium exists and the undistorted equilibrium is the unique unprejudiced, universally divine equilibrium. The implication of our results is that high quality is signaled by high but undistorted prices in the case of experience composite goods, contrary to the case of single experience goods