Quantity rationing is often observed to occur in actual markets where quality is difficult to observe. Standard theory suggests such markets must be in disequilibrium, since firms could increase profits by raising price. This paper develops a model in which consumers learn about firm quality from noisy observations of output quality. In equilibrium, quantity rationing may occur in which low price signals high quality (and vice versa), and high-quality firms ration demand initially. Examples are luxury cars and fine restaurants. Copyright 1991 by The London School of Economics and Political Science.
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Volume (Year): 58 (1991)
Issue (Month): 230 (May)
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