High prices signal quality in competitive markets, giving low quality firms power.
Firms in a competitive market can signal high quality by setting high prices. In a scenario where firms have different product qualities but this information is private, there are strategies where firms reveal their quality through pricing. Even low quality firms can have market power when competing against high quality firms. High quality firms charge higher prices but may lose customers to rivals more often. Some equilibria show high market power, while others are more competitive. With enough firms, quality information is revealed in all equilibria.