Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

32 Pages Posted: 3 Nov 2012

See all articles by James J. Anton

James J. Anton

Duke University - Fuqua School of Business; Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Gary Biglaiser

University of North Carolina

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics; National and Kapodistrian University of Athens - Faculty of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 28, 2012

Abstract

We analyze a simple dynamic durable good oligopoly model where sellers are capacity constrained. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition; thus it is possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer would bene…t from either a commitment not to buy in the future or by hiring an agent with instructions to buy always from the lowest priced seller.

Keywords: Strategic buyers, capacity constraints, bilateral oligopoly, dynamic competition

JEL Classification: D4, L1

Suggested Citation

Anton, James J. and Biglaiser, Gary and Vettas, Nikolaos, Dynamic Price Competition with Capacity Constraints and a Strategic Buyer (September 28, 2012). Economic Research Initiatives at Duke (ERID) Working Paper No. 137, Available at SSRN: https://ssrn.com/abstract=2170409

James J. Anton (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0097
United States
919-660-7754 (Phone)
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Duke University - Department of Economics

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Duke Innovation & Entrepreneurship Initiative ( email )

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Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+30 210 8203179 (Phone)

National and Kapodistrian University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+30 210 8203179 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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