The value of Congestion

We provide a model in which a queue for a good communicates the quality of the good to consumers. Agents arrive randomly at a market, and observe the queue length and a private signal (good or bad) about the good. Service departures from the queue are also random. Agents decide whether to join the queue and obtain the good or to balk. When waiting costs are zero, agents receiving a bad signal join the queue only if it is long enough. When the waiting costs are non-zero, agents do not join the queue if it is too long. Furthermore, agents with bad signals may play non–threshold strategies. In equilibrium, an agent is more likely to enter a queue for a low quality good than balk from a queue for a high quality good. Under specified conditions, both a high quality firm and a social planner maximizing consumer surplus prefer a low service rate to a high one, due to the information externality. ∗We thank seminar participants at Columbia, CETC and the Carnegie Mellon/Technische Univer