Strategic Buying to Prevent Seller Exit

Abstract

We consider a dynamic oligopoly model in which a seller may drop out of the market when demand for its product is insufficient in the first period. Buyers suffer some disutility if a seller exits the market and so their first period purchase decision does not only depend on current period preferences and prices, but also on the potential effect that their behavior has on the probability of seller survival. Specifically, some buyers may choose to purchase from the seller with the lower survival probability even though they like the other seller's product better, a behavior that we call strategic buying. We analyze how the incidence of strategic buying depends on parameters and also the implications of the strategic buying motive for sellers' first period pricing decisions.

Keywords: Strategic buying, seller exit

JEL Classification: D43