Price competition with capacity uncertainty - feasting on leftovers

Robert Somogyi, Wouter Vergote and Gabor Virag

Games and Economic Behavior, 2023, vol. 140, issue C, 253-271

Abstract: There is ample empirical evidence documenting that large firms set significantly lower prices than smaller, capacity-constrained, firms. This is paradoxical in light of the standard theoretical result that large firms charge higher prices than small firms in models of price competition with capacity constraints. We argue that private information about capacity constraints can account for this puzzle. We provide concavity conditions on the demand and on the type distribution under which there exists a unique, monotone decreasing price equilibrium. Solving the model requires a novel approach of studying several different regions of pricing incentives depending on the realized capacity levels. We show that firms with intermediate capacities compete in an auction type interaction, while firms with low or high capacity levels compete less vigorously on the margin.

Keywords: Capacity constraint; Capacity uncertainty; Bertrand-Edgeworth competition (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:140:y:2023:i:c:p:253-271

DOI: 10.1016/j.geb.2023.03.010

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