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Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure

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  • James D. Dana Jr.

Abstract

When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 30 (1999)
Issue (Month): 4 (Winter)
Pages: 632-660

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Handle: RePEc:rje:randje:v:30:y:1999:i:winter:p:632-660

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Cited by:
  1. Chen, Yongmin & Zhang, Tianle, 2014. "Interpersonal Bundling," MPRA Paper 56165, University Library of Munich, Germany.
  2. Marc Möller & Makoto Watanabe, . "Competition in the Presence of Individual Demand Uncertainty," Tinbergen Institute Discussion Papers 13-185/V, Tinbergen Institute.
  3. Alderighi, Marco, 2010. "Fare dispersions in airline markets: A quantitative assessment of theoretical explanations," Journal of Air Transport Management, Elsevier, vol. 16(3), pages 144-150.
  4. 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.
  5. Paul W. Dobson & Claudio A. Piga, 2009. "Mergers and Business Model Assimilation: Evidence from Low-Cost Airlines Takeovers," Discussion Paper Series 2009_2, Department of Economics, Loughborough University, revised Feb 2009.
  6. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc.
  7. Baylis, Kathy & Perloff, Jeffrey M., 2001. "Price Dispersion on the Internet: Good Firms and Bad Firms," Institute for Research on Labor and Employment, Working Paper Series qt2t0770rn, Institute of Industrial Relations, UC Berkeley.
  8. Escobari, Diego & Jindapon, Paan, 2014. "Price Discrimination through Refund Contracts in Airlines," MPRA Paper 53629, University Library of Munich, Germany.
  9. Escobari, Diego & Lee, Sang-Yeob, 2012. "Demand shifting across flights and airports in a spatial competition model," MPRA Paper 38799, University Library of Munich, Germany.
  10. Halevy, Yoram & Michtaich, Igal, 2005. "Poisson Price Dispersion," Microeconomics.ca working papers halevy-05-07-26-12-10-45, Vancouver School of Economics, revised 25 Feb 2014.
  11. Angela Stefania Bergantino & Capozza, Claudia, 2012. "Airline Pricing Behaviour Under Limited Intermodal Competition," Working Papers 1206, SIET Società Italiana di Economia dei Trasporti e della Logistica, revised 2012.
  12. Severin Borenstein & Nancy L. Rose, 2007. "How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry," NBER Working Papers 13452, National Bureau of Economic Research, Inc.
  13. Steven L. Puller & Anirban Sengupta & Steven N. Wiggins, 2009. "Testing Theories of Scarcity Pricing in the Airline Industry," NBER Working Papers 15555, National Bureau of Economic Research, Inc.
  14. Roland Strausz, . "Regulating Availability with Demand Uncertainty," Papers 019, Departmental Working Papers.
  15. Andrew Sweeting, 2008. "Equilibrium Price Dynamics in Perishable Goods Markets: The Case of Secondary Markets for Major League Baseball Tickets," NBER Working Papers 14505, National Bureau of Economic Research, Inc.
  16. Marc Möller & Makoto Watanabe, 2013. "Competition in the Presence of Individual Demand Uncertainty," CESifo Working Paper Series 4490, CESifo Group Munich.
  17. Hao Wang, 2001. "Resale Price Maintenance in an Oligopoly with Uncertain Demand," Working Papers 01-11, Ohio State University, Department of Economics.
  18. Severin Borenstein & Nancy L. Rose, 2013. "How Airline Markets Work…or Do They? Regulatory Reform in the Airline Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 63-135 National Bureau of Economic Research, Inc.

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