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Competition in the presence of individual demand uncertainty

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  • Marc Möller
  • Makoto Watanabe

Abstract

This paper sheds light on a recent empirical controversy about the effect of competition on price discrimination in airline markets (Borenstein and Rose (1994), Gerardi and Shapiro, (2009)). We introduce individual demand uncertainty into Hotelling’s model of horizontal product differentiation and show that in equilibrium, firms offer advance purchase discounts. Consumers trade–off an early (uninformed) purchase at a low price against a late (informed) purchase at a high price. Relative to a (multi-product) monopolist, competing firms offer larger discounts, leading to an intertemporal distribution of sales that is more skewed towards low prices. We show that whether competition has a positive or a negative effect on the Gini coefficient of price dispersion depends on the degree of product differentiation and the level of demand uncertainty.
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Suggested Citation

  • Marc Möller & Makoto Watanabe, 2016. "Competition in the presence of individual demand uncertainty," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 273-292, May.
    • Handle: RePEc:bla:randje:v:47:y:2016:i:2:p:273-292
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    File URL: http://hdl.handle.net/10.1111/rand.2016.47.issue-2
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    Cited by:

    1. Natalia Fabra & Juan-Pablo Montero, 2022. "Product Lines and Price Discrimination in Markets with Information Frictions," Management Science, INFORMS, vol. 68(2), pages 981-1001, February.
    2. Debashrita Mohapatra & Debi Prasad Mohapatra & Ram Sewak Dubey, 2024. "Price dispersion across online platforms: evidence from hotel room prices in London (UK)," Applied Economics, Taylor & Francis Journals, vol. 56(52), pages 6598-6610, November.
    3. Herbst, Holger, 2015. "Pricing Heterogeneous Goods under Ex Post Private Information," Bonn Econ Discussion Papers 01/2015, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. Alderighi, Marco & Gaggero, Alberto A. & Piga, Claudio A., 2022. "Hidden prices with fixed inventory: Evidence from the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 157(C), pages 42-61.
    5. Chenhang Zeng, 2020. "Advance selling of new products considering retailers’ learning," International Journal of Economic Theory, The International Society for Economic Theory, vol. 16(3), pages 306-328, September.
    6. Mark Armstrong & Jidong Zhou, 2016. "Search Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 26-57.
    7. Oksana Loginova, 2021. "Advance selling, competition, and brand substitutability," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1765-1781, October.
    8. Yannis Kerkemezos & Bas Karreman, 2020. "On the Benefits of Being Alone: Scheduling Changes, Intensity of Competition and Dynamic Airline Pricing," Tinbergen Institute Discussion Papers 20-042/VII, Tinbergen Institute.
    9. Seo, Kyowon & Go, Sarang & Kim, Byungdo, 2020. "Pricing strategies under markets with time gap between purchase and consumption," Journal of Business Research, Elsevier, vol. 120(C), pages 312-320.
    10. Paolo Figini & Simona Cicognani & Lorenzo Zirulia, 2023. "Booking in the Rain. Testing the Impact of Public Information on Prices," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(3), pages 1329-1364, November.
    11. Marc Möller & Makoto Watanabe, 2016. "Market Structure and Advance Selling," Tinbergen Institute Discussion Papers 16-020/VII, Tinbergen Institute.
    12. Nadia Ceschi & Marc Möller, 2023. "Advance Selling in the Wake of Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 71(4), pages 1072-1089, December.
    13. Junshan Lin & Chenhang Zeng, 2023. "Pre-order strategies with demand uncertainty and consumer heterogeneity," The Japanese Economic Review, Springer, vol. 74(1), pages 83-115, January.
    14. Xuwang Liu & Yujie Zhang & Junwei Wang, 2024. "The two‐stage presale pricing for online products considering anchoring effect and payment pain reduction," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(6), pages 3865-3885, September.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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