Strategic Price Decision Inducing Consumer Rationing: Theory and Evidence

Kwang-Sook Huh
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Kwang-Sook Huh: POSCO Research Institute

Korean Economic Review, 2008, vol. 24, 233-257

Abstract: This paper assumes that consumers make their quality inference in part on the basis of past excess demand for the good. It indicates that excess demand in the previous period can influence subsequent potential buyers�� purchasing behavior. It may then be rational for a firm introducing a new product to adjust its initial production and price to increase the likelihood of excess demand in an attempt to influence potential consumers�� perception of quality and, thus, subsequent demand. This paper formally develops a model that demonstrates this result in the context of a market with demand and quality uncertainty. The model��s predictions are tested using a data set of new cars in the US, and empirical results support the theory.

Keywords: Excess Demand; Consumption Externality; Quality Perceptions; Inventory (search for similar items in EconPapers)
JEL-codes: D83 L1 L62 (search for similar items in EconPapers)
Date: 2008
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