On July 18, 2013, Prof. Cheng-Zhong Qin will give a talk on "Price and Shortage as Signals of Quality".
Abstract:
This paper analyzes the role of seller-induced shortage as a signal of quality for a monopoly firm. Unlike dissipative advertising, the cost of inducing shortage is different for different quality types. It is shown that under certain conditions, a high-quality monopoly firm (of a new indivisible product) that signals quality by properly setting price and inducing shortage makes more pro t than using price and dissipative advertising. The result provides a rationale for why high quality product monopolies may prefer to initially limit supply with or without lowering the price.