Strategic pricing, signalling, and costly information acquisition

Consider a market where an informed monopolist sets the price for a good or asset with a value unknown to potential buyers. Upon observing the price, buyers may pay some cost for information about the value before deciding on purchases. Under a belief-restriction, which generalizes the idea of the Cho-Kreps 'intuitive criterion', we establish a version of the Grossman-Stiglitz Paradox: there is no separating equilibrium with fully revealing prices. Yet, we also resolve the paradox. There is a unique equilibrium, and as the cost of information becomes small, the equilibrium approaches the full information outcome and prices become perfectly revealing. (C) 2001 Elsevier Science B.V. All rights reserved.