Why Do Firms Contrive Shortages? The Economics of Intentional Mispricing

David D Haddock and Fred S McChesney

Economic Inquiry, 1994, vol. 32, issue 4, 562-81

Abstract: Given buyers' product-specific information capital, firms may increase long-run profits by underpricing (rationing) rather than clearing markets when demands or costs rise transitorily. To minimize resulting shortages' costs, sellers predictably would distinguish among customer groups, managing any queues of disappointed loyal buyers that materialized (but largely ignoring transitory buyer queues), and would discourage resale. Unlike other shortage models, short-run excess demand necessarily implies neither buyers who prefer consuming in groups nor waiting costs that are negligible. Any sense of unfair price increases would arise endogenously from sellers' failures to value appropriately customers' otherwise prudent informational investments. Copyright 1994 by Oxford University Press.

Date: 1994
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