IDEAS home Printed from https://ideas.repec.org/a/bla/ausecp/v45y2006i3p241-252.html
   My bibliography  Save this article

Quality Competition With Stochastic Demand And Costly Search: Theory And Evidence From The Video Rental Market

Author

Listed:
  • AMANDA S. KING
  • JOHN T. KING

Abstract

A theoretical model is developed to predict optimal service rates in markets where firms compete in availability. We show that firms are more likely to stock-out of popular products as the cost of consumer search increases. Carlton (1978) showed that, in a zero-profit competitive environment, firms balance the risk of not being able to serve a particular customer against the cost of holding excess capacity and that this balancing act will result in an equilibrium in which not all customers are served. The model was later adapted to oligopolistic competition by Peters (1984) and Deneckere and Peck (1995). This paper extends this literature on competition under stochastic demand by developing a model that incorporates 1) the possibility that customers may be able to purchase from another firm in the case of a stock-out and 2) the option for firms to offer an imperfect substitute in order to persuade some customers to make a purchase when the first choice product is out of stock. Empirical evidence is presented in support of the theoretical model using data collected from video rental outlets in a midsize southeastern US city. Copyright Blackwell Publishing Ltd/ University of Adelaide and Flinders University 2006.

Suggested Citation

  • Amanda S. King & John T. King, 2006. "Quality Competition With Stochastic Demand And Costly Search: Theory And Evidence From The Video Rental Market," Australian Economic Papers, Wiley Blackwell, vol. 45(3), pages 241-252, September.
  • Handle: RePEc:bla:ausecp:v:45:y:2006:i:3:p:241-252
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-8454.2006.00290.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dennis W. Carlton & James D. Dana, 2004. "Product Variety and Demand Uncertainty," NBER Working Papers 10594, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ausecp:v:45:y:2006:i:3:p:241-252. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0004-900X .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.