Abstract: By making use of the trading data from Taobao.com, this paper divides the online shopping process into two stages to conduct an analysis. The results confirm that the price signaling game in China’s online market converges on separating equilibrium. This indicates that price which represents quality information of commodities in the environment of uncertain information has a positive impact on demand. This positive effect occurs mainly in the first searching phase of shopping. However, during the final decision making stage, the law of demand is still effective, leading to the generally negative impact of price on demand. Different from the mechanism of direct price rising in the auction market, reputation can indirectly promote product sales in the price-clearly-marked markets and enhance the signal transmission of prices; while the existence of herd behavior may weaken the signal transmission of price to a certain degree.

Key words: incomplete information; signaling game; two-stage decision-making; online shopping; taobao.com