Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure
Volume: Volume 30, No. 4
Issue: Winter 1999
Pages: pp. 632-660
Authors: James D. Dana, Jr.
Title: Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure
Abstract: When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.
JEL Classification
Production, Pricing, and Market Structure; Size and Size Distribution of
Firms Concentration, Product Differentiation, Entry and Exit (L110)
Market Structure and Pricing: Monopoly (D420)
Market Structure, Firm Strategy, and Market Performance: Oligopoly and Other Imperfect Markets;
monopolistic competition; contestable markets (L130)
Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection (D430)
Market Structure, Firm Strategy, and Market Performance: Monopoly;
Monopolization Strategies cartels; collusion (L120)
Equilibria
Equilibrium
Firm, Firms
Market Structure
Monopolists
Oligopolists