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 (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 InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 990.
Date of creation: May 1992
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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
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Other versions of this item:
- 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.
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