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Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis

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Author Info
Raymond Deneckere
James Peck

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Abstract

We consider a two-stage game in which firms simultaneously select prices and capacities. Then, a random number of consumers attends the market and selects a firm to visit. Consumers know all prices and quantities but not the realization of aggregate demand. The probability of being served at any firm depends on its capacity and the mixed strategy chosen by consumers, which equalizes the utility of each firm's price-service pair. We show that there exists at most one equilibrium in which firms choose pure strategies, and characterize the "candidate" equilibrium. Consumers face a probability of being rationed, firms may have excess inventory, and the price remains above marginal cost. When there are sufficiently many firms, the candidate is shown to be an equilibrium.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 26 (1995)
Issue (Month): 1 (Spring)
Pages: 148-162
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Handle: RePEc:rje:randje:v:26:y:1995:i:spring:p:148-162

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  1. Massimo A. De Francesco, 2005. "Matching buyers and sellers," Economics Bulletin, Economics Bulletin, vol. 3(31), pages 1-10. [Downloadable!]
  2. Edner Bataille & Benoit Julien, 2005. "Advertising, Pricing & Market Structure in Competitive Matching Markets," Industrial Organization 0511008, EconWPA. [Downloadable!]
  3. David, Laurent & Le Breton, Michel & Merillon, Olivier, 2007. "Public Utility Pricing and Capacity Choice with Stochastic Demand," IDEI Working Papers 489, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. Christopher T. Conlon & Julie Holland Mortimer, 2008. "Demand Estimation Under Incomplete Product Availability," NBER Working Papers 14315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Mei Xue & Patrick T. Harker, 2003. "Service Co-Production, Customer Efficiency and Market Competition," Center for Financial Institutions Working Papers 03-03, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  6. Massimo A. De Francesco, 2004. "Pricing and matching under duopoly with imperfect buyer mobility," Department of Economics University of Siena 439, Department of Economics, University of Siena. [Downloadable!]
  7. James D. Dana, 2000. "Competition in Price and Availability when Availability is Unobservable," Econometric Society World Congress 2000 Contributed Papers 1450, Econometric Society. [Downloadable!]
    Other versions:
  8. James Peck, 1995. "Competition in Transactions Mechanisms: The Emergence of Price Competition," Working Papers 022, Ohio State University, Department of Economics. [Downloadable!]
    Other versions:
  9. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Mass Torts and the Incentives for Suit, Settlement, and Trial," Working Papers 0713, Department of Economics, Vanderbilt University. [Downloadable!]
  10. Dennis W. Carlton & James D. Dana, 2004. "Product Variety and Demand Uncertainty," NBER Working Papers 10594, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Dennis W. Carlton, 1996. "A Critical Assessment of the Role of Imperfect Competition in Macroeconomics," NBER Working Papers 5782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2008. "The Effects of Capacity on Sales Under Alternative Vertical Contracts," NBER Working Papers 14611, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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