Elena Istomina

Working Papers

(Previously circulated as Sorting Stock Through Sales: Inventory Turnover and Outlets)

Abstract: I model markdown pricing as a tool for price discrimination by product quality when quality is only observable to consumers. A seller offers durable goods of uncertain quality. She introduces new inventory at high prices and gradually marks down unsold inventory. Consumers arrive sequentially, choose a price point at which to inspect a good, observe its quality, and decide whether to purchase. Their decisions endogenously sort products by quality across markdown levels, resulting in indirect price discrimination by quality. I characterize sorting equilibria: steady states in which consumers optimally choose prices for inspection and sustain the quality distribution through their purchases. Despite the richness of the equilibrium set, the main result shows that any equilibrium can be summarized by a single statistic. Consumer and seller payoffs depend only on the relative quality difference between the highest and lowest prices, while intermediate markdowns and the sorting path are payoff-irrelevant. I show that the seller faces a fundamental trade-off: she must sacrifice sales volume and efficiency to achieve quality-based price discrimination.

Abstract: The paper extends the classical monopolistic screening model of Mussa & Rosen (1978), assuming the buyer cannot self-select in a menu. Instead, the seller price-discriminates by learning the buyer's preferences through communication. Communication is noisy and costly to the seller, and the buyer is strategic about his report. Under regularity restrictions on communication costs, I show the seller's problem of joint communication and menu design reduces to a rational inattention problem about the buyer's virtual type. The model delivers that costly communication may increase or decrease the efficiency of quality allocation, depending on the distribution of types and the convexity of production costs. Relative to the social planner facing the same communication costs, the seller chooses communication that is wastefully precise. The paper also establishes that adding ex-post constraints can be beneficial to the seller, as they can be a substitute for costly direct communication.

Abstract: This paper models an uninformed seller negotiating with informed buyers when completing the transaction requires time and effort. The buyer exerts costly effort to expedite the deal, while the seller learns about the buyer's enthusiasm and adjusts her pricing over time. Anticipating this, the buyer strategically speeds up or slows down the process. I show that the seller's beliefs about the buyer and the final price exhibit tipping points: the seller becomes more pessimistic over time as higher buyer types exert more effort, leading to abrupt shifts in beliefs and market activity. Under some conditions, the market comes to a freeze right before a burst of activity.