This paper considers the pricing decision by a seller who has private
information about quality. Demand is perfectly inelastic (rectangular)
. For example, there may be a single buyer who wants exactly one unit
and whose valuation is known by the seller. It;is noted that, contrary
to widespread belief, separating equilibria do exist in this model, a
llowing some trade of high quality products even when the average qual
ity is low. Moreover, by. slightly perturbing demand, we can use stand
ard equilibrium refinements to uniquely select the best separating equ
ilibrium outcome. Since the chosen outcome has a very simple structure
regardless of the number of quality levels, this model could be a use
ful workhorse in applications. (C) 1997 Elsevier Science B.V.