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On Separating Equilibria with Positive Excess Demand for a Monopolistic Market

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Author Info
Cheng-Zhong Qin (University of California, Santa Barbara)
Abstract

This paper offers an explanation for the rationality of why successful businesses sometimes maintain excess demand. The explanation is motivated from the signaling role of excess demand for firms. Considering a monopolistic market for a good whose quality is not known to the consumers, a firm may use excess demand as a signal by strategically cutting back its supply. The paper establishes conditions with which there exists a separating equilibrium with positive excess demand. It also demonstrates that it is more profitable to signal quality by excess demand than by (traditional) advertising under certain conditions. This in turn shows that restraining supply is another way to advertise.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 01-06.

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Date of creation: 28 Mar 2006
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Handle: RePEc:cdl:ucsbec:01-06

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Related research
Keywords: advertising; queuing; signaling; perfect Bayesian equilibrium;

References listed on IDEAS
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  1. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  2. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  3. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October. [Downloadable!] (restricted)
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