Monopoly, quality uncertainty and ‘status’ goods

Abstract

This paper provides an explanation of price and wage rigidities in certain industrial structures. It considers products for which quality is important or the possession of which enhances a person's ‘status’. It is argued that an individual's desire for such a good or service may be positively related to the amount of aggregate excess demand for it. It is then shown that this gives rise to a natural discontinuity in demand which may result in price rigidities. This explains, for instance, why it may be profit-maximising for a doctor facing a long waiting-line of patients not to raise his fees.