Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure

James Dana

RAND Journal of Economics, 1999, vol. 30, issue 4, 632-660

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.

Date: 1999
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