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Endogenously determined Quality and Price In a Two-Sector Competitive Service Market With an Application to Down-Hill Skiing

  • James G. Mulligan

    ()

    (Department of Economics,University of Delaware)

This paper illustrates the importance of the role of long-run capacity constraints in a model explaining the effect of real income and transportation cost on long-run lift-ticket prices and lift capacity in a competitive two-sector ski industry. Despite the large number of game-theoretic models in the literature linking excess capacity to higher prices and limited entry, the model explains large increases in capacity and real prices over time despite a static number of skier-days per year without having to resort to an argument based on market power. This approach, thus, has points in common with work by Sutton (1991 and 1998) on endogenous vertical differentiation and persistent market concentration. The distinguishing feature of this paper, however, is that it links endogenous changes in service capacity directly to changes in both quality and price.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-01.pdf
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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-01.

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Length: 25 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-01
Contact details of provider: Postal: Purnell Hall, Newark, Delaware 19716
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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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  1. Wilson, Robert, 1992. "Strategic models of entry deterrence," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 10, pages 305-329 Elsevier.
  2. James G. Mulligan & Emmanuel Llinares, 2003. "Market Segmentation and the Diffusion of Quality-Enhancing Innovations: The Case of Downhill Skiing," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 493-501, August.
  3. Lieberman, Marvin B, 1987. "Excess Capacity as a Barrier to Entry: An Empirical Appraisal," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 607-27, June.
  4. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
  5. Mulligan, James G., 1986. "Technical change and scale economies given stochastic demand and production," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 189-201, June.
  6. Leemore S. Dafny, 2005. "Games Hospitals Play: Entry Deterrence in Hospital Procedure Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(3), pages 513-542, 09.
  7. Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
  8. Lyons, Bruce R., 1986. "The welfare loss due to strategic investment in excess capacity," International Journal of Industrial Organization, Elsevier, vol. 4(1), pages 109-119, March.
  9. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September.
  10. Basu, Kaushik & Singh, Nirvikar, 1990. "Entry-Deterrence in Stackelberg Perfect Equilibria," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 61-71, February.
  11. Scott Morton, Fiona M., 2000. "Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1085-1104, October.
  12. Singh, Satwinder & Utton, Michael & Waterson, Michael, 1998. "Strategic behaviour of incumbent firms in the UK," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 229-251, March.
  13. Suzanne Scotchmer, 1985. "Two-Tier Pricing of Shared Facilities in a Free-Entry Equilibrium," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 456-472, Winter.
  14. Morey, Edward R, 1984. "The Choice of Ski Areas: Estimation of a Generalized CES Preference Ordering with Characteristics," The Review of Economics and Statistics, MIT Press, vol. 66(4), pages 584-90, November.
  15. Brad Barham & Roger Ware, 1993. "A Sequential Entry Model with Strategic Use of Excess Capacity," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 286-98, May.
  16. Barro, Robert J & Romer, Paul M, 1987. "Ski-Lift Pricing, with Applications to Labor and Other," American Economic Review, American Economic Association, vol. 77(5), pages 875-90, December.
  17. Richard G. Walsh & Nicole P. Miller & Lynde O. Gilliam, 1983. "Congestion and Willingness to Pay for Expansion of Skiing Capacity," Land Economics, University of Wisconsin Press, vol. 59(2), pages 195-210.
  18. Davidson, Carl, 1988. "Equilibrium in Servicing Industries: An Economic Application of Queuing Theory," The Journal of Business, University of Chicago Press, vol. 61(3), pages 347-67, July.
  19. Dennis W. Carlton, 2004. "Why Barriers to Entry Are Barriers to Understanding," American Economic Review, American Economic Association, vol. 94(2), pages 466-470, May.
  20. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
  21. Mulligan, James G, 1983. "The Economies of Massed Reserves," American Economic Review, American Economic Association, vol. 73(4), pages 725-34, September.
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