Capacity Pricing Under Uncertainty

95/38/EPS

Posted: 3 Jul 1998

See all articles by Michael Kende

Michael Kende

Federal Communications Commission (FCC)

Lars-Hendrik Röller

ESMT European School of Management and Technology; Centre for Economic Policy Research (CEPR); WZB Berlin Social Science Center - Competitiveness and Industrial Change

Date Written: April 1995

Abstract

This paper shows the profit-maximising pricing strategy of a monopolist selling a fixed capacity before a certain time. The driving example is an airline filling a plane before departure time. The results show that the fear of rationing taking place at departure induces consumers with a high valuation to pay a premium at an earlier date. This premium varies with the number of potential consumers and the number of remaining seats. Another equilibrium is for the monopolist to simply set prices at a high level and leave with unused capacity. The authors also analyse the incentives for the monopolist to reduce capacity ex ante, in order to increase the likelihood of rationing equilibria to emerge.

JEL Classification: L12

Suggested Citation

Kende, Michael and Röller, Lars-Hendrik, Capacity Pricing Under Uncertainty (April 1995). 95/38/EPS, Available at SSRN: https://ssrn.com/abstract=7194

Michael Kende (Contact Author)

Federal Communications Commission (FCC) ( email )

1919 M Street, NW
Washington, DC 20554
United States

Lars-Hendrik Röller

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://www.esmt.org/eng/faculty-research/lars-hendrik-roeller/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

WZB Berlin Social Science Center - Competitiveness and Industrial Change ( email )

Reichpietschufer 50
10785 Berlin
Germany
+49 30 2549 1440 (Phone)
+49 30 2549 1442 (Fax)

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