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This paper analyses a firm's incentive to use price as a signal of quality in a duopoly competition, even though she can credibly and costlessly disclose her true quality. When a firm sets a higher price to signal higher quality, it has strategic effects on the price chosen by her rival. This could result in higher equilibrium prices and profits. Hence, a mandatory disclosure law is useful to prevent the practice of using of higher price as a device to signal higher quality, and in turn equilibrium prices would be lower. From a welfarist point of view, this argument justifies the establishment of such disclosure law.
