Competition in the Presence of Individual Demand Uncertainty

Marc Möller () and Makoto Watanabe

No 13-185/V, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper sheds light on a recent empirical controversy about the effect of competition on price discrimination in airline markets (Borenstein and Rose (1994), Gerardi and Shapiro, (2009)). We introduce individual demand uncertainty into Hotelling’s model of horizontal product differentiation and show that in equilibrium, firms offer advance purchase discounts. Consumers trade–off an early (uninformed) purchase at a low price against a late (informed) purchase at a high price. Relative to a (multi-product) monopolist, competing firms offer larger discounts, leading to an intertemporal distribution of sales that is more skewed towards low prices. We show that whether competition has a positive or a negative effect on the Gini coefficient of price dispersion depends on the degree of product differentiation and the level of demand uncertainty.

Keywords: Competition; Price Dispersion; Individual Demand Uncertainty; Advance Purchase Discounts (search for similar items in EconPapers)
JEL-codes: D43 D80 L13 (search for similar items in EconPapers)
Date: 2013-11-15
New Economics Papers: this item is included in nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://papers.tinbergen.nl/13185.pdf (application/pdf)

Related works:
Journal Article: Competition in the presence of individual demand uncertainty (2016)
Working Paper: Competition in the Presence of Individual Demand Uncertainty (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130185

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().