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Competition in Price and Availability when Availability is Unobservable

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Author Info
James D. Dana (Northwestern University)

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Abstract

This paper presents a strategic model of competition in both price and availability when firms can publicly commit to prices but not inventories (or capacities). Demand is uncertain and firms stock out in equilibrium. Consumers choose where to shop on the basis of price and expected service rate (the probability of being served). In a one period model, I show that although firms cannot affect consumers' expectations of their service rates by increasing inventory, they can signal higher service rates with higher prices (regardless of whether price or inventory is chosen first). This extra incentive to raise price generates a floor on equilibrium prices and industry profits that exists regardless of the number of firms. When price is set before output, high prices create incentives for firm to hold more inventory. So rational consumers anticipate high priced firms will have higher service rates. Applications of this model to video rental competition and other retail competition are discussed. When output is set before price, high prices act as a signal of high availability. This equilibrium is the unique equilibrium satisfying the never-a-weak-best-response property. Rational consumers anticipate high priced firms will have higher service rates and that firms that deviate to low prices must have changed their availability as well. In a repeated game firms that maintain reputations for higher service rates may earn even higher profits.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1450.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1450

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring. [Downloadable!] (restricted)
    Other versions:
  2. Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January. [Downloadable!] (restricted)
  3. Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December. [Downloadable!] (restricted)
  4. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 647-58, October. [Downloadable!] (restricted)
  5. Andrew F. Daughety & Jennifer F. Reinganum, 1991. "Endogenous Availability in Search Equilibrium," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 287-306, Summer. [Downloadable!] (restricted)
  6. Noah Gans, 1999. "Customer Learning and Loyalty When Quality is Uncertain," Center for Financial Institutions Working Papers 99-11, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  7. Rogerson, William P, 1987. "The Dissipation of Profits by Brand Name Investment and Entry when Price Guarantees Quality," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 797-809, August. [Downloadable!] (restricted)
  8. Noah Gans, 1999. "Customer Loyalty and Supplier Strategies for Quality Competition," Center for Financial Institutions Working Papers 99-12, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  9. Horstmann, Ignatius J & MacDonald, Glenn M, 1994. "When Is Advertising a Signal of Product Quality?," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 3(3), pages 561-84, Fall.
  10. Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-27, September. [Downloadable!] (restricted)
  11. van Damme, Eric & Hurkens, Sjaak, 1997. "Games with Imperfectly Observable Commitment," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 282-308, October. [Downloadable!] (restricted)
  12. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  13. Smallwood, Dennis E & Conlisk, John, 1979. "Product Quality in Markets Where Consumers are Imperfectly Informed," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 1-23, February. [Downloadable!] (restricted)
  14. Carlton, Dennis W, 1979. "Contracts, Price Rigidity, and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1034-62, October. [Downloadable!] (restricted)
  15. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring. [Downloadable!] (restricted)
  16. Allen, Franklin & Faulhaber, Gerald R, 1988. "Optimism Invites Deception," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 397-407, May. [Downloadable!] (restricted)
  17. William P. Rogerson, 1983. "Reputation and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 508-516, Autumn. [Downloadable!] (restricted)
  18. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 885-913, August. [Downloadable!] (restricted)
    Other versions:
  19. Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-36, December. [Downloadable!] (restricted)
  20. Andrew F. Daughety & Jennifer F. Reinganum, 1992. "Search Equilibrium with Endogenous Recall," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 184-202, Summer. [Downloadable!] (restricted)
  21. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  22. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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 0704, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
    Other versions:
  2. David Spector, 2002. "The Noisy Duopolist," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 2(1), pages 1053-1053. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  4. 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 609, Econometric Society. [Downloadable!]
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Mass Torts and the Incentives for Suit, Settlement, and Trial," Working Papers 0713, Department of Economics, Vanderbilt University. [Downloadable!]
  6. James Jozefowicz & Jason Kelley & Stephanie Brewer, 2008. "New Release: An Empirical Analysis of VHS/DVD Rental Success," Atlantic Economic Journal, International Atlantic Economic Society, vol. 36(2), pages 139-151, June. [Downloadable!] (restricted)
  7. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2008. "The Effects of Capacity on Sales Under Alternative Vertical Contracts," NBER Working Papers 14611, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Christopher T. Conlon & Julie Holland Mortimer, 2008. "Demand Estimation Under Incomplete Product Availability," NBER Working Papers 14315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Michael A. Arnold & Christine Saliba, 2003. "Price Dispersion in Online Markets: The Case of College Textbooks," Working Papers 03-02, University of Delaware, Department of Economics. [Downloadable!]
  10. Curt Taylor, 2004. "Privacy and Information Acquisition in Competitive Markets," Berkeley Olin Program in Law & Economics, Working Paper Series 1165, Berkeley Olin Program in Law & Economics. [Downloadable!]
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