Buying Frenzies and Seller-Induced Excess Demand

Abstract

I explain why a monopolist would knowingly create excess demand. Suppose customers initially do not know their valuation for a good but over time become informed. Although customers prefer purchasing after becoming informed, a monopolist prefers selling to customers while uninformed, because a group of uninformed customers has a more homogeneous (expected) valuation for the good than do customers. Selling fewer units than the number of customers induces customers to purchase while uninformed, because anyone waiting to purchase until becoming finds no units available. This buying frenzy behavior allows the monopolist to set price above the informed market-clearing price.