Price as a Signal of Product Availability: Is it Cheap?

Abstract

Firms have more information than their customers about the availability of the product. Given the increase in the strategic nature of customers, who consider both prices with future availability risk in making their purchase decisions, the firm may be interested in communicating this information to customers to impact the timing of their purchase. In this paper, we study whether firms can indeed use prices to signal product availability information to their customers. We prove that a signaling or separating equilibrium always exists in which prices perfectly communicate the product availability. Further, we find conditions on the model primitives for which separation is costly, in particular, the firm must price differently from its full information price to signal its product availability.

Keywords: Signaling Games, Inventory, Pricing