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Strategic Price Decision Inducing Consumer Rationing: Theory and Evidence

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  • Kwang-Sook Huh

    (POSCO Research Institute)

Abstract

This paper assumes that consumers make their quality inference in part on the basis of past excess demand for the good. It indicates that excess demand in the previous period can influence subsequent potential buyers�� purchasing behavior. It may then be rational for a firm introducing a new product to adjust its initial production and price to increase the likelihood of excess demand in an attempt to influence potential consumers�� perception of quality and, thus, subsequent demand. This paper formally develops a model that demonstrates this result in the context of a market with demand and quality uncertainty. The model��s predictions are tested using a data set of new cars in the US, and empirical results support the theory.

Suggested Citation

  • Kwang-Sook Huh, 2008. "Strategic Price Decision Inducing Consumer Rationing: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 24, pages 233-257.
    • Handle: RePEc:kea:keappr:ker-20080630-24-1-09
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Excess Demand; Consumption Externality; Quality Perceptions; Inventory;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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