Pricing is a very effective signaling device, no doubt about it. People (and businesses) assume that good stuff is worth more. People pay for stuff on eBay for stuff based on the velocity of the auction instead of the innate value of the item. Real estate brokers warn you that a house that doesn’t sell right away is hard to sell because people look at a house that’s been on the market for a few months differently. All irrational and all based on signaling.
The reason that lousy movies cost the same as blockbuster movies, though, doesn’t have to do with signalling. (the fear is that people won’t go to cheap movies because the cheap price will tell them it is a lousy movie). Of course, this isn’t what happens with DVD sales. They sell plenty of really cheap DVDs that you never heard of… for a lot less than the new Star Wars Movie. No, the pricing of movies has to do with industry traditions and being stuck. It’s just too hard to get everything in alignment and for all the players to say okay.
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