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A Signaling Theory of Limited Supply

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This paper analyzes the role of seller-induced shortage as a signal of quality. Unlike dissipative advertising, the cost of inducing shortage is different for different quality types. It is shown that under certain conditions, a high-quality monopoly firm that signals quality by inducing shortage makes more profit than using price alone or combined with dissipative advertising. This is because the forgone profit from the lost sales is always lower for the high-quality firm than for the low-quality firm. The result explains why high-quality firms may prefer to initially limit supply with a price weakly lower than that in the complete-information case.
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Keywords: PERFECT BAYESIAN EQUILIBRIUM; QUALITY SIGNALING; SELLER-INDUCED SHORTAGE

Document Type: Research Article

Publication date: 01 September 2018

This article was made available online on 22 September 2017 as a Fast Track article with title: "A Signaling Theory of Limited Supply".

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  • Founded as Zeitschrift für die gesamte Staatswissenschaft in 1844.

    As one of the oldest journals in the field of political economy, the Journal of Institutional and Theoretical Economics (JITE) deals traditionally with the problems of economics, social policy, and their legal framework. JITE is listed in the Journal of Economic Literature, the Social Science Citation Index, the International Bibliography of the Social Sciences, and COREJ.

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    From 2013 on all accepted articles are published in an Online First version (in their final layout) to make them searchable and citable by their DOI immediately after peer review and acceptance. Once the article is published in an issue of the journal, the Online First version will be removed.

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