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Competition in Price and Availability When Availability is Unobservable

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  • Dana, James D, Jr

Abstract

I present a strategic model of competition in price and availability in which demand is uncertain and consumers choose where to shop given firms' observable prices and their expectations of firms' unobservable inventories. In both a single-period Cournot model (inventories are chosen first) and a single-period Bertrand model (prices are chosen first), I show that firms use higher prices to "signal" higher availability. This creates a floor on equilibrium prices and industry profits regardless of the number of firms. The model is useful in understanding the relationship between price and availability in the video rental industry. Copyright 2001 by the RAND Corporation.

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Bibliographic Info

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

Volume (Year): 32 (2001)
Issue (Month): 3 (Autumn)
Pages: 497-513

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Handle: RePEc:rje:randje:v:32:y:2001:i:3:p:497-513

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  1. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 885-913, August.
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  15. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 647-58, October.
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Cited by:
  1. Zhenlin Yang & Lydia Gan & Fang-Fang Tang, 2007. "A Study of Pricing Evolution in the Online Toy Market," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 0704, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  2. James Jozefowicz & Jason Kelley & Stephanie Brewer, 2008. "New Release: An Empirical Analysis of VHS/DVD Rental Success," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 36(2), pages 139-151, June.
  3. Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2006. "Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships," NBER Working Papers 12177, National Bureau of Economic Research, Inc.
  4. Arnold, Michael A. & Saliba, Christine, 2011. "Asymmetric capacity constraints and equilibrium price dispersion," Economics Letters, Elsevier, Elsevier, vol. 111(2), pages 158-160, May.
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Mass Torts and the Incentives for Suit, Settlement, and Trial," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0713, Vanderbilt University Department of Economics.
  6. Michael Sattinger, 2002. "A Queuing Model of the Market for Access to Trading Partners," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 533-548, May.
  7. Michael A. Arnold & Christine Saliba, 2003. "Price Dispersion in Online Markets: The Case of College Textbooks," Working Papers, University of Delaware, Department of Economics 03-02, University of Delaware, Department of Economics.
  8. Ali Yurukoglu, 2012. "Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals," NBER Working Papers 17987, National Bureau of Economic Research, Inc.
  9. David A. Matsa, 2011. "Running on Empty? Financial Leverage and Product Quality in the Supermarket Industry," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 3(1), pages 137-73, February.
  10. Christopher T. Conlon & Julie Holland Mortimer, 2008. "Demand Estimation Under Incomplete Product Availability," NBER Working Papers 14315, National Bureau of Economic Research, Inc.
  11. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers, IESE Business School D/809, IESE Business School.
  12. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
  13. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2011. "The Effects Of Capacity On Sales Under Alternative Vertical Contracts," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 117-154, 03.
  14. Arie Beresteanu, 2004. "Demand Shifts and Second Degree Price discimination - the Impact of DVDs on the Motion Pictures Industry," Econometric Society 2004 North American Winter Meetings, Econometric Society 609, Econometric Society.
  15. R. Preston McAfee & Hugo Mialon & Sue Mialon, 2005. "Does Large Price Discrimination Imply Great Market Power?," Emory Economics, Department of Economics, Emory University (Atlanta) 0525, Department of Economics, Emory University (Atlanta).
  16. Taylor, Curt, 2004. "Privacy and Information Acquisition in Competitive Markets," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt5hk0k89w, Berkeley Olin Program in Law & Economics.
  17. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier, Elsevier.

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