Elena Istomina

Working Papers

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

Abstract: model markdown pricing as a tool for indirect price discrimination by product value. New inventory of uncertain value is initially introduced at higher prices and unsold goods are gradually marked down. Consumers arrive sequentially, choose a price at which to inspect a good, observe its value, and decide whether to purchase. Since unsold goods are negatively selected, consumer search and purchase decisions endogenously sort products by their value across different markdown tiers. I introduce and characterize sorting equilibria: steady states in which consumer decisions and the distribution of inventory by its expected value across prices are mutually consistent. Despite complex sorting dynamics and a rich equilibrium set, the main result shows that equilibrium payoffs depend only on a single statistic: the gap in expected inventory value between the initial price tier and the terminal markdown tier. The paper also highlights a fundamental trade-off: greater sorting and price discrimination of goods comes at the cost of lower sales and reduced total welfare.

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.