SELLING A LEMON UNDER DEMAND UNCERTAINTY

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.