  I show that firms price almost competitively and consumers can infer product
quality from prices in markets where firms differ in quality and production
cost, and learning prices is costly. Bankruptcy risk or regulation links higher
quality to lower cost. If high-quality firms have lower cost, then they can
signal quality by cutting prices. Then the low-quality firms must cut prices to
retain customers. This price-cutting race to the bottom ends in a separating
equilibrium in which the low-quality firms charge their competitive price and
the high-quality firms charge slightly less.
