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Imperfect competition with costly disposal

Severin Lenhard

International Journal of Industrial Organization, 2022, vol. 82, issue C

Abstract: This paper studies the effect of disposal costs on consumer surplus and firms’ profits. First, we analyze a monopolist producing inventories either early on at a low cost and with little information about demand, or later with more information yet at a higher cost. Unsold products are discarded. The firm forgoes an early production cost advantage if and only if the disposal cost and demand uncertainty are both simultaneously high. Expected disposal decreases in its cost, yet the firm lowers its production to mitigate costs, resulting in lower expected profit and consumer surplus. Similar results hold for firms competing in sales volumes with unobserved inventories. Ex-ante symmetric firms may choose different production timings. The disposal cost substitutes information about demand, thereby affecting a firm’s information advantage. Accordingly, a firm’s expected profit may increase with the disposal cost. Firms may adjust their production timing, resulting in a discontinuous change in the expected profit and consumer surplus.

Keywords: Disposal; Inventory; Timing of production; Uncertain demand (search for similar items in EconPapers)
JEL-codes: D04 L11 L13 L50 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:82:y:2022:i:c:s0167718722000182

DOI: 10.1016/j.ijindorg.2022.102842

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