Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

16 Pages Posted: 30 Jul 2014

See all articles by James J. Anton

James J. Anton

Duke University

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: August 2014

Abstract

We analyze a simple dynamic durable good model. 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, making it 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 benefits from either a commitment not to make future purchases or by hiring an agent to always buy from the lowest priced seller.

Suggested Citation

Anton, James J. and Biglaiser, Gary and Vettas, Nikolaos, Dynamic Price Competition with Capacity Constraints and a Strategic Buyer (August 2014). International Economic Review, Vol. 55, Issue 3, pp. 943-958, 2014, Available at SSRN: https://ssrn.com/abstract=2473860 or http://dx.doi.org/10.1111/iere.12077

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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