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American Economic Review: Vol. 101 No. 4 (June 2011)

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Information and Prices with Capacity Constraints

Article Citation

Lester, Benjamin. 2011. "Information and Prices with Capacity Constraints." American Economic Review, 101(4): 1591-1600.

DOI: 10.1257/aer.101.4.1591

Abstract

In the theoretical literature on consumer search, one conclusion is nearly universal: as buyers become better able to observe and compare prices ex ante, sellers will set lower prices in equilibrium. In this paper, I examine a standard consumer search model with one small -- yet often relevant -- additional restriction: I assume that sellers are capacity constrained. In this environment, I illustrate that the conventional wisdom regarding information and prices does not necessarily hold: having more informed consumers can lead to a decrease in prices, have no effect at all, or even lead to an increase in prices.

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Online Appendix (174.77 KB)

Authors

Lester, Benjamin (U Western Ontario)

JEL Classifications

D11: Consumer Economics: Theory
D83: Search; Learning; Information and Knowledge; Communication; Belief
L11: Production, Pricing, and Market Structure; Size Distribution of Firms


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