Repeated Signalling Games and Dynamic Trading Relationships
A seller of a nondurable good repeatedly faces a buyer who is privately informed about the position of his demand curve. The seller offers a price in each period. The buyer chooses a quantity given the price. The quantity demanded reveals information about the buyer. An equilibrium is characterized with the feature that buyer types separate completely in the first period. This equilibrium uniquely satisfies a modified refinement of the Cho-Kreps criterion. Despite the immediate separation, the buyer distorts his behavior throughout the game. The requirement to signal types can raise the utility of all types of informed players.