Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

Posted by Social Science Research Network

Dynamic Price Competition with Capacity Constraints and a Strategic Buyer – James J. Anton (Duke University), Gary Biglaiser (University of North Carolina) and Nikolaos Vettas (Athens University of Economics and Business – Department of Economics ; University of Athens – Faculty of Economics ; Centre for Economic Policy Research)

ABSTRACT: We analyze a simple dynamic durable good model. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition, making it possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer benefits from either a commitment not to make future purchases or by hiring an agent to always buy from the lowest priced seller.