Why market shares matter: An information-based theory

Consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods. When firms are ignorant about q, consumers rationally believe that a firm with a high market share is likely to produce a high-quality good. As a result, firms try to signal-jam the inferences of consumers and compete for market shares beyond the level explained by short-run profit maximization. When firms know q, multiple equilibria may exist, but under a regularity condition, there is one equilibrium in which market shares signal quality, and then the market tends to be more competitive.