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Competition over Price and Service Rate when Demand is Stochastic: A Strategic Analysis

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  • Raymond Deneckere
  • James Peck

Abstract

We consider a two-stage game in which firms simultaneously select prices and capacities (or equivalently, outputs). Then, a random number of consumers attend the market, and each consumer 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. Consumers distribute themselves across firms so as to equalize the utility of each 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 many firms, the candidate is shown to be an equilibrium.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 990.

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Date of creation: May 1992
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Handle: RePEc:nwu:cmsems:990

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Web page: http://www.kellogg.northwestern.edu/research/math/
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Cited by:
  1. Edner Bataille & Benoit Julien, 2005. "Advertising, Pricing & Market Structure in Competitive Matching Markets," Industrial Organization 0511008, EconWPA.
  2. 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.
  3. 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.
  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.

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