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Endogenous Availability in Search Equilibrium

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

Abstract

Strategic variables (such as availability) can be used to increase customers' search costs, thus increasing the price that can be supported in equilibrium. Customers can "purchase" bargaining power by shopping at two firms and then bringing those firms into competition with one another. Knowing this, firms adjust quoted prices to keep customers from exercising this option. We compare equilibrium prices and availability, firm profits, and customer welfare under duopoly with those that would obtain under monopoly. We find that for low levels of (exogenous) customer search costs, duopolists provide lower prices and lower availability, while for high customer search costs, duopolists provide the same price but greater availability than would a monopolist.

Suggested Citation

  • 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.
  • Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:287-306
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    Cited by:

    1. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    2. Esther Gal-Or & Mordechai Gal-Or & Anthony Dukes, 2007. "Optimal information revelation in procurement schemes," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 400-418, June.
    3. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.
    4. Marcelo Olivares & GĂ©rard P. Cachon, 2009. "Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets," Management Science, INFORMS, vol. 55(9), pages 1586-1604, September.
    5. Charles J. Thomas, 2012. "An Alternating-Offers Model of Multilateral Negotiations," Working Papers 12-31, Chapman University, Economic Science Institute.

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