Competition in Price and Availability when Availability is Unobservable
This paper presents a strategic model of competition in both price and availability when firms can publicly commit to prices but not inventories (or capacities). Demand is uncertain and firms stock out in equilibrium. Consumers choose where to shop on the basis of price and expected service rate (the probability of being served). In a one period model, I show that although firms cannot affect consumers' expectations of their service rates by increasing inventory, they can signal higher service rates with higher prices (regardless of whether price or inventory is chosen first). This extra incentive to raise price generates a floor on equilibrium prices and industry profits that exists regardless of the number of firms. When price is set before output, high prices create incentives for firm to hold more inventory. So rational consumers anticipate high priced firms will have higher service rates. Applications of this model to video rental competition and other retail competition are discussed. When output is set before price, high prices act as a signal of high availability. This equilibrium is the unique equilibrium satisfying the never-a-weak-best-response property. Rational consumers anticipate high priced firms will have higher service rates and that firms that deviate to low prices must have changed their availability as well. In a repeated game firms that maintain reputations for higher service rates may earn even higher profits.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- van Damme, E.E.C. & Hurkens, J.P.M., 1997.
"Games with imperfectly observable commitment,"
Other publications TiSEM
98d6e8cb-38a1-4341-b53e-d, Tilburg University, School of Economics and Management.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Franklin Allen & Gerald R. Faulhaber, 1988. "Optimism Invites Deception," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 397-407.
- Benjamin L. Schwartz, 1966. "A New Approach to Stockout Penalties," Management Science, INFORMS, vol. 12(12), pages B538-B544, August.
- Rogerson, William P, 1987. "The Dissipation of Profits by Brand Name Investment and Entry when Price Guarantees Quality," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 797-809, August.
- Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-36, December.
- Noah Gans, 1999. "Customer Loyalty and Supplier Strategies for Quality Competition," Center for Financial Institutions Working Papers 99-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Andrew F. Daughety & Jennifer F. Reinganum, 1992. "Search Equilibrium with Endogenous Recall," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 184-202, Summer.
- Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
- 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.
- Carlton, Dennis W, 1979. "Contracts, Price Rigidity, and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1034-62, October.
- Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
- Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-27, September.
- Dennis E. Smallwood & John Conlisk, 1979. "Product Quality in Markets Where Consumers are Imperfectly Informed," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 1-23.
- Gould, John P, 1978. "Inventories and Stochastic Demand: Equilibrium Models of the Firm and Industry," The Journal of Business, University of Chicago Press, vol. 51(1), pages 1-42, January.
- Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 885-913.
- Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
- Noah Gans, 1999. "Customer Learning and Loyalty When Quality is Uncertain," Center for Financial Institutions Working Papers 99-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Horstmann, Ignatius J & MacDonald, Glenn M, 1994. "When Is Advertising a Signal of Product Quality?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 561-84, Fall.
- Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
- B. L. Schwartz, 1970. "Optimal Inventory Policies in Perturbed Demand Models," Management Science, INFORMS, vol. 16(8), pages B509-B518, April.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1450. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.