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A Note on Optimal Price Cutting Behavior under Demand Uncertainty

Tim R. Sass
The Review of Economics and Statistics
Vol. 70, No. 2 (May, 1988), pp. 336-339
Published by: The MIT Press
DOI: 10.2307/1928319
Stable URL: http://www.jstor.org/stable/1928319
Page Count: 4
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
A Note on Optimal Price Cutting Behavior under Demand Uncertainty
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Abstract

Lazear's "Clearance Sales" model is modified to incorporate the effects of the size of the population of potential customers on a seller's optimal price cutting strategy. The resulting theory is tested with data on pricing behavior in the residential housing market. It is shown that in markets for very expensive homes, where there are few potential buyers, prices are cut faster in the market for moderately priced homes. Further, in sales of new homes and homes with recent previous sales, where the seller likely possesses superior prior information about demand, prices tend to be cut more slowly.

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