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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: oligopoly, strategic consumers, limited-lifetime product, rational expectations equilibrium
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

al Nowaihi, A., P. Levine. 1985. The stability of the Cournot oligopoly model: A reassessment. Journal of Economic Theory 35(2) 307-321.

Allenby, G., L. Jen, R. Leone. 1996. Economic trends and being trendy: The influence of consumer confidence on retail fashion sales. Journal of Business & Economic Statistics 14(1) 103-111.

Aviv, Y., Y. Levin, M. Nediak. 2009. Counteracting strategic consumer behavior in dynamic pricing systems. S. Netessine, C. Tang, eds., Consumer-Driven Demand and Operations Management Models. Springer, 323-352.

Balakrishnan, A., M. Pangburn, E. Stavrulaki. 2004. "Stack them high, let'em fly": Lot-sizing policies when inventories stimulate demand. Management Science 50(5) 630-644.

Bell, D., R. Keeney, J. Little. 1975. A market share theorem. Journal of Marketing Research 12(2) 136-141.

Buehler, S., D. Gartner. 2013. Making sense of nonbinding retail-price recommendations. American Economic Review 103(1) 335-359.

Bulow, J., J. Geanakoplos, P. Klemperer. 1985. Multimarket oligopoly: Strategic substitutes and complements. Journal of Political Economy 93(3) 488-511.

Busse, M., C. Knittel, F. Zettelmeyer. 2013. Are consumers myopic? evidence from new and used car purchases. American Economic Review 103(1) 220-256.

Butz, David A. 1996. Does the per se rule deter vertical price-fixing? Economic Inquiry 34(4) 770-780.

Cachon, G., R. Swinney. 2009. Purchasing, pricing, and quick response in the presence of strategic consumers. Management Science 55(3) 497-511.

Coase, R. 1972. Durability and monopoly. The Journal of Law and Economics 15(1) 143-149.

Farahat, A., G. Perakis. 2011. A comparison of Bertrand and Cournot profits in oligopolies with differentiated products. Operations Research 59(2) 507-513.

Fisher, F. 1961. The stability of the Cournot oligopoly solution: The effects of speeds of adjustment and increasing marginal costs. The Review of Economic Studies 125-135.

Gallego, G., W. Huh, W. Kang, R. Phillips. 2006. Price competition with the attraction demand model: Existence of unique equilibrium and its stability. Manuf. Serv. Oper. Man. 8(4) 359-375.

Klapper, Daniel, Helmut Herwartz. 2000. Forecasting market share using predicted values of competitive behavior: Further empirical results. International Journal of Forecasting 16(3) 399-421.

Kluberg, J., G. Perakis. 2012. Generalized quantity competition for multiple products and loss of efficiency. Operations Research 60(2) 335-350.

Kreps, D., J. Scheinkman. 1983. Quantity precommitment and Bertrand competition yield Cournot outcomes. The Bell Journal of Economics 14(2) 326-337.

Lazear, E. 1986. Retail pricing and clearance sales. American Economic Review 76 14-32.

Lemmens, A., C. Croux, M. Dekimpe. 2005. The European consumer: United in diversity? Tech. Rep. ERS-2005-022-MKT, ERIM Report Series Research in Management.

Liu, Q., G. van Ryzin. 2008. Strategic capacity rationing to induce early purchases. Management Science 54(6) 1115-1131.

Monahan, G. 1987. The structure of equilibria in market share attraction models. Management Science 33(2) 228-243.

Naert, P., M. Weverbergh. 1981. On the prediction power of market share attraction models. Journal of Marketing Research 18(2) 146-153.

Orbach, B. 2008. Antitrust vertical myopia: the allure of high prices. Arizona Law Review 50 261-287.

Pigou, A. 1932. The economics of welfare. Macmillan and Co., Limited.

Pompeo, L., T. Sapountzis. 2002. Freight expectations. The McKinsey Quarterly 2 90-99.

Shen, Z., X. Su. 2007. Customer behavior modeling in revenue management and auctions: A review and new research opportunities. Production and Operations Management 16(6) 713-728.

Sherali, H., A. Soyster, F. Murphy. 1983. Stackelberg-Nash-Cournot equilibria: Characterizations and computations. Operations Research 31(2) 253-276.

Su, X. 2007. Inter-temporal pricing with strategic customer behavior. Management Science 53(5) 726-741.

Su, X., F. Zhang. 2008. Strategic customer behavior, commitment, and supply chain performance. Management Science 54(10) 1759-1773.

Theocharis, R. 1960. On the stability of the Cournot solution on the oligopoly problem. The Review of Economic Studies 27(2) 133-134.

Tirole, J. 1988. The Theory of Industrial Organization. MIT Press.