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Buying Frenzies and Seller-Induced Excess Demand

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  • Patrick DeGraba
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    Abstract

    I explain why a monopolist would knowingly create excess demand. Suppose customers initially do not know their valuation for a good but over time become informed. Although customers prefer purchasing after becoming informed, a monopolist prefers selling to customers while uninformed, because a group of uninformed customers has a more homogeneous (expected) valuation for the good than do informed customers. Selling fewer units than the number of customers induces customers to purchase while uninformed, because anyone waiting to purchase until becoming informed finds no units available. This "buying frenzy" behavior allows the monopolist to set price above the "informed" market-clearing price.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 26 (1995)
    Issue (Month): 2 (Summer)
    Pages: 331-342

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    Handle: RePEc:rje:randje:v:26:y:1995:i:summer:p:331-342

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    Cited by:
    1. Armstrong, Mark & Zhou, Jidong, 2013. "Search Deterrence," MPRA Paper 48568, University Library of Munich, Germany.
    2. Paul Klemperer & Jeremy Bulow, 1998. "Prices and the Winners Curse," Economics Series Working Papers 1998-W02, University of Oxford, Department of Economics.
    3. Pascal Courty, 2005. "Buying Frenzies," Economics Working Papers ECO2005/27, European University Institute.
    4. P. Garella, 1997. "Price Discrimination and the Location Choice of a Durable Goods Monopoly," Working Papers 282, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
    6. Volker Nocke & Martin Peitz, 2004. "Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers," PIER Working Paper Archive 04-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    7. Marc Möller & Makoto Watanabe, 2013. "Competition in the Presence of Individual Demand Uncertainty," CESifo Working Paper Series 4490, CESifo Group Munich.
    8. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
    9. Jeong-Yoo Kim, 2002. "Rationing as a Signal," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(2), pages 115-122, August.
    10. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.
    11. Marc Möller & Makoto Watanabe, . "Competition in the Presence of Individual Demand Uncertainty," Tinbergen Institute Discussion Papers 13-185/V, Tinbergen Institute.

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