Competition in Price and Availability When Availability is Unobservable

Dana, James Dwight

doi:10.2307/2696365

Cited by 100 publications

(63 citation statements)

References 32 publications

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“…The authors demonstrate that unless the number of firms is large, a pure strategy equilibrium may fail to exist because firms have an incentive to undercut each other's prices, similar to models of Bertrand competition. Dana (2001) extends this analysis to the case of observable prices but unobservable inventory levels. He shows that in this case, prices tend to be positively related to inventory levels.…”

Section: Literature Reviewmentioning

confidence: 87%

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On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

Zhang

2009

Management Science

237

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This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex ante, commits to a particular quantity) and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex post, if the product is out of stock). Interestingly, the seller has an incentive to overcompensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity. June , 2007; revised December, 2007, July, 2008 Abstract This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations (RE) equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex-ante, commits to a particular quantity), and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex-post, if the product is out of stock). Interestingly, the seller has an incentive to over-compensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity. Disciplines Marketing

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Section: Literature Reviewmentioning

confidence: 87%

“…In fact, this probability is given by A(q) ≡ E(X∧q) E(X) . The argument proceeds as follows, and is due to Deneckere and Peck (1995) and further explored by Dana (2001). Notice that the product is available with probability x∧q x , when there are x consumers in the market.…”

Section: Basic Modelmentioning

confidence: 99%

On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

Zhang

2009

Management Science

237

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“…Even when the titles are temporarily out of stock, their prices are also significantly higher than when they are unavailable. This is supported by a study (Dana, 2001) that argued some retailers use high prices as a signal for high availability so as to draw customers' traffic. Once again, the price is negatively related to the SDPrice variable in a highly significant way, showing that the higher the price dispersion, the lower the price on average.…”

Section: Empirical Results Based On the Second Data Setmentioning

confidence: 75%

A Study of Price Evolution in Online Toy Market

2010

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We study and contrast pricing and price evolution of online only (Dotcom) and online branch of multi-channel retailers (OBMCRs) based on two panel data sets collected from online toy markets. Panel data regression analyses reveal several interesting empirical results: over time, OBMCRs and Dotcoms charge similar prices on average but Dotcoms significantly increase their shipping costs that eventually drive the overall average price of Dotcoms higher than that of OBMCRs. Price dispersions of both types of retailers are persistent. The price dispersion of OBMCRs is higher than that of Dotcoms at the beginning and does not change much over time, but the price dispersion of Dotcoms increases significantly over time, indicating that the latter will eventually be higher than the former. Moreover, the OBMCRs charge significantly different prices, but the Dotcoms charge similar prices. JEL L11, L81, L86

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“…For a given seller's choice of prices and degree of availability, a consumer chooses among …ve possible plans: (i) "never buy,"(ii) "buy item 1 if available and don't buy otherwise," (iii) "buy item 2 if available and don't buy otherwise," (iv) "buy item 1 if available and otherwise buy item 2 if available"and (v) "buy item 2 if available and otherwise buy item 1 if available." 25 Let 2 ff?g ; f1; ?g ; f2; ?g ; f1; 2g ; f2; 1gg denote a consumer's plan and let H; denote the distribution over …nal consumption outcomes induced jointly by H and . In a personal equilibrium the behavior generating expectations must be optimal given the expectations:…”

Section: Consumers'demandmentioning

confidence: 99%

“…There are a few papers analyzing on the role of product availability as a strategic variable in various oligopoly settings (see Daughety and Reinganum, 1991;Chakravarty and Ghose, 1994;Balachander and Farquhar, 1994;Dana, 2001b;Watson, 2009). In these models, …rms supply only one product and by competing (also) in availability, they are able to charge higher prices.…”

Section: Introductionmentioning

confidence: 99%

Selling substitute goods to loss‐averse consumers: limited availability, bargains, and rip‐offs

Rosato

2016

The RAND J of Economics

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Why are some sale items subject to limited availability while other substitute items are available in large quantities and are priced relatively high at the same point in time? Can such a retail strategy lure consumers into purchasing the more expensive item? This paper characterizes the pro…t-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. Consumers have unit demand, are interested in buying only one good, and their reference point is given by their recent rational expectations about what consumption value they would receive and what price they would pay. The seller maximizes pro…ts by raising the consumers'reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-o¤), which the consumers buy if the bargain is not available to minimize their disappointment. The seller might prefer to o¤er a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The model suggests that the current FTC Guides Against Bait Advertising, by allowing retailers to employ limited-availability sales, could reduce consumer and social welfare.JEL classi…cation: D11; D42; L11.

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Competition in Price and Availability When Availability is Unobservable

Cited by 100 publications

References 32 publications

On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

A Study of Price Evolution in Online Toy Market

Selling substitute goods to loss‐averse consumers: limited availability, bargains, and rip‐offs

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