Abstract
A seller produces goods of two qualities: high and low. While the seller cannot observe individual product quality, consumers can, and they only purchase high-quality goods at higher prices. The seller becomes more pessimistic about the unsold inventory and reallocates it to a discount store. The key insight is that improving product sorting across stores requires attracting more consumers to a high-priced location so that fewer high-quality goods remain unsold and become available at a discount. This greater sorting enables the seller to charge a higher premium for high-quality goods, but it comes at the cost of reduced sales volume due to fewer consumers purchasing at higher prices. I extend this equilibrium relationship between sales volume, pricing, and product sorting to a model with a continuum of stores and provide additional insights into the seller’s optimal strategy.

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