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Quantity Competition in the Presence of Strategic Consumers

Bazhanov, Andrei and Levin, Yuri and Nediak, Mikhail (2015): Quantity Competition in the Presence of Strategic Consumers.

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Abstract

An arbitrary number of retailers compete in capacities of a homogeneous limited-lifetime product offered to strategic consumers with heterogeneous valuations and a general discount factor. The first-period price is fixed, whereas the second-period (clearance) price is determined by market clearing. We provide a closed-form characterization of symmetric pure-strategy equilibria, which may lead to no sales in the first or second period and sales in both periods with clearance price above or at salvage value. In equilibrium, increasing competition may harm local economy. Retailers reduce inventories when consumers' discount factor increases. As a result, having more strategic consumers can benefit competing retailers and insure them against sales at salvage value. Moreover, an increase in consumers' discount factor increases consumer inequality in terms of utility and may even decrease the total consumer surplus.

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