Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis
AbstractWe consider a two-stage game in which firms simultaneously select prices and capacities. Then, a random number of consumers attends the market and selects a firm to visit. Consumers know all prices and quantities but not the realization of aggregate demand. The probability of being served at any firm depends on its capacity and the mixed strategy chosen by consumers, which equalizes the utility of each firm's price-service pair. We show that there exists at most one equilibrium in which firms choose pure strategies, and characterize the "candidate" equilibrium. Consumers face a probability of being rationed, firms may have excess inventory, and the price remains above marginal cost. When there are sufficiently many firms, the candidate is shown to be an equilibrium.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 26 (1995)
Issue (Month): 1 (Spring)
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Other versions of this item:
- Raymond Deneckere & James Peck, 1992. "Competition over Price and Service Rate when Demand is Stochastic: A Strategic Analysis," Discussion Papers 990, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Mass Torts and the Incentives for Suit, Settlement, and Trial," Vanderbilt University Department of Economics Working Papers 0713, Vanderbilt University Department of Economics.
- Edner Bataille & Benoit Julien, 2005. "Advertising, Pricing & Market Structure in Competitive Matching Markets," Industrial Organization 0511008, EconWPA.
- Marvel, Howard P. & Wang, Hao, 2009. "Distribution contracts to support optimal inventory holdings under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 625-631, September.
- Mei Xue & Patrick T. Harker, 2003. "Service Co-Production, Customer Efficiency and Market Competition," Center for Financial Institutions Working Papers 03-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
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