Signaling Quality via Long Lines and Uninformative Prices

49 Pages Posted: 3 Apr 2012 Last revised: 18 Jun 2018

See all articles by Laurens Debo

Laurens Debo

Dartmouth College - Tuck School of Business

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Date Written: June 7, 2018

Abstract

Firms sometimes nurture long lines, rather than raising prices to eliminate waiting times. We justify this practice by considering the informational role of a queue in a setting in which a firm can also adjust its price to signal its quality to uninformed consumers. When the proportion of informed consumers is low, to separate on price a high-quality firm must raise its price above the monopoly price. We show that there exist pooling equilibria in which firms instead charge a price lower than the monopoly price. We characterize two pooling equilibria. In both equilibria, a high-quality firm on average has a longer queue than a low-quality one, and long lines signal high quality. In the first one, the price is sufficiently low that short lines in turn signal low quality, so that the queue length almost perfectly reveals the type of the firm. In the second one, the price is in an intermediate range (but remains lower than the monopoly price), and short lines are an imperfect signal of quality. In each of the pooling equilibria, the high-quality firm earns a higher profit than in the separating equilibrium, despite the longer lines. Therefore, a firm will sometimes signal the quality of a new or improved product via long queues rather than by charging a high price to reduce the queue length.

JEL Classification: D42, D83, L15

Suggested Citation

Debo, Laurens and Rajan, Uday and Veeraraghavan, Senthil K., Signaling Quality via Long Lines and Uninformative Prices (June 7, 2018). Chicago Booth Research Paper No. 12-13. Available at SSRN: https://ssrn.com/abstract=2033909 or http://dx.doi.org/10.2139/ssrn.2033909

Laurens Debo (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://oid.wharton.upenn.edu/profile/senthilv/

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