Competition in Price and Availability When Availability is Unobservable

Posted: 24 Sep 2001

See all articles by James D. Dana

James D. Dana

Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy

Abstract

I present a strategic model of competition in price and availability in which demand is uncertain and consumers choose where to shop given firms' observable prices and their expectations of firms' unobservable inventories. In both a single-period Cournot model (inventories are chosen first) and a single-period Bertrand model (prices are chosen first), I show that firms use higher prices to "signal" higher availability. This creates a floor on equilibrium prices and industry profits regardless of the number of firms. The model is useful in understanding the relationship between price and availability in the video rental industry.

Suggested Citation

Dana, James D., Competition in Price and Availability When Availability is Unobservable. RAND Journal of Economics, Vol. 32, No. 3, Available at SSRN: https://ssrn.com/abstract=279770

James D. Dana (Contact Author)

Northeastern University - Department of Economics ( email )

301 Lake Hall
Boston, MA 02115
United States
617-373-7517 (Phone)

HOME PAGE: http://www.economics.neu.edu/dana/

Northeastern University - Department of International Business and Strategy

360 Huntington Ave
Boston, MA 02115
United States

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