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Why Do Firms Contrive Shortages? The Economics of Intentional Mispricing

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  • Haddock, David D
  • McChesney, Fred S

Abstract

Given buyers' product-specific information capital, firms may increase long-run profits by underpricing (rationing) rather than clearing markets when demands or costs rise transitorily. To minimize resulting shortages' costs, sellers predictably would distinguish among customer groups, managing any queues of disappointed loyal buyers that materialized (but largely ignoring transitory buyer queues), and would discourage resale. Unlike other shortage models, short-run excess demand necessarily implies neither buyers who prefer consuming in groups nor waiting costs that are negligible. Any sense of unfair price increases would arise endogenously from sellers' failures to value appropriately customers' otherwise prudent informational investments. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Haddock, David D & McChesney, Fred S, 1994. "Why Do Firms Contrive Shortages? The Economics of Intentional Mispricing," Economic Inquiry, Western Economic Association International, vol. 32(4), pages 562-581, October.
  • Handle: RePEc:oup:ecinqu:v:32:y:1994:i:4:p:562-81
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    Cited by:

    1. Dutta, Shantanu & Bergen, Mark & Levy, Daniel, 2002. "Price flexibility in channels of distribution: Evidence from scanner data," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1845-1900, September.
    2. Kwang-Sook Huh, 2008. "Strategic Price Decision Inducing Consumer Rationing: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 24, pages 233-257.
    3. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
    4. Micha Gisser & James E. McClure & Giray Okten & Gary Santoni, 2009. "Some Anomalies Arising from Bandwagons that Impart Upward Sloping Segments to Market Demand," Econ Journal Watch, Econ Journal Watch, vol. 6(1), pages 21-34, January.
    5. Daniel K. Benjamin, 2010. "Armen Alchian on Evolution, Information, and Cost: The Surprising Implications of Scarcity," Chapters,in: The Elgar Companion to the Chicago School of Economics, chapter 14 Edward Elgar Publishing.
    6. Daniel Levy & Haipeng (Allan) Chen & Sourav Ray & Mark Bergen, 2004. "Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention," Working Papers 2004-08, Bar-Ilan University, Department of Economics.
    7. Tabarrok, Alexander, 2008. "The hot-toy problem," Journal of Economic Behavior & Organization, Elsevier, vol. 67(2), pages 512-516, August.
    8. Evan L. Porteus & Hyoduk Shin & Tunay I. Tunca, 2010. "Feasting on Leftovers: Strategic Use of Shortages in Price Competition Among Differentiated Products," Manufacturing & Service Operations Management, INFORMS, vol. 12(1), pages 140-161, November.
    9. Mark Zbaracki & Mark Bergen & Shantanu Dutta & Daniel Levy & Mark Ritson, 2005. "Beyond the Cost of Price Adjustment: Investments in Pricing Capital," Macroeconomics 0505013, EconWPA.
    10. Julio J. Rotemberg, 2011. "Fair Pricing," Journal of the European Economic Association, European Economic Association, vol. 9(5), pages 952-981, October.
    11. Gil S. Epstein, 2007. "Production, inventory and waiting time," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 579-589.
    12. Agostini, Claudio & Saavedra, Eduardo H., 2013. "Chile: Port congestion and efficient rationing in cargo transfer operations," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    13. 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.

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