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A Signaling Theory of Limited Supply

Author

Listed:
  • Taradas Bandyopadhyay
  • Baomin Dong
  • Cheng-Zhong Qin

Abstract

This paper analyzes the role of seller-induced shortage as a signal of quality. 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 that signals quality by inducing shortage makes more profit than using price alone or combined with dissipative advertising. This is because the forgone profit from the lost sales is always lower for the high-quality firm than for the low-quality firm. The result explains why high-quality firms may prefer to initially limit supply with a price weakly lower than that in the complete-information case.

Suggested Citation

  • Taradas Bandyopadhyay & Baomin Dong & Cheng-Zhong Qin, 2018. "A Signaling Theory of Limited Supply," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 174(3), pages 476-494, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201809)174:3_476:astols_2.0.tx_2-v
    DOI: 10.1628/093245617X15041722135156
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    Citations

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    Cited by:

    1. Feng, Hong & Fu, Qiang & Zhang, Lan, 2020. "How to Launch a New Durable Good: A Signaling Rationale for Hunger Marketing," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    2. John Gilbert & Onur A. Koska & Reza Oladi, 2023. "Foreign market entry, upstream market power, and endogenous mode of downstream competition," Review of International Economics, Wiley Blackwell, vol. 31(1), pages 341-362, February.

    More about this item

    Keywords

    seller-induced shortage; quality signaling; perfect Bayesian equilibrium;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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