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Selling A Lemon Under Demand Uncertainty

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  • Kyungmin Kim
  • Sun Hyung Kim

Abstract

We consider a seller who has private information about the quality of her good but is uncertain about buyer arrivals. Assuming that the high‐quality seller insists on a price, we show that the low‐quality seller's surplus and pricing strategy crucially depend on buyers' knowledge about the demand state. If they are also uncertain about demand, then demand uncertainty increases the low‐quality seller's expected payoff, and her optimal strategy is to lower the price after some time. If buyers know the demand state, then demand uncertainty does not affect the low‐quality seller's payoff, but she must employ a sophisticated pricing strategy.

Suggested Citation

  • Kyungmin Kim & Sun Hyung Kim, 2019. "Selling A Lemon Under Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 75-103, February.
    • Handle: RePEc:wly:iecrev:v:60:y:2019:i:1:p:75-103
    DOI: 10.1111/iere.12345
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