SELLING A LEMON UNDER DEMAND UNCERTAINTY

Kyungmin Kim and Sun Hyung Kim

International Economic Review, 2019, vol. 60, issue 1, 75-103

Abstract: We consider a seller who has private information about the quality of her good but is uncertain about buyer arrivals. Assuming that the high‐quality seller insists on a price, we show that the low‐quality seller's surplus and pricing strategy crucially depend on buyers' knowledge about the demand state. If they are also uncertain about demand, then demand uncertainty increases the low‐quality seller's expected payoff, and her optimal strategy is to lower the price after some time. If buyers know the demand state, then demand uncertainty does not affect the low‐quality seller's payoff, but she must employ a sophisticated pricing strategy.

Date: 2019
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