Document Type
Discussion Paper
Publication Date
6-2024
CFDP Number
2394
CFDP Pages
71
Journal of Economic Literature (JEL) Code(s)
C7, D4, D6, L0
Abstract
We study dynamic price competition between sellers offering differentiated products with limited capacity and a common sales deadline. In every period, firms simultaneously set prices, and a randomly arriving buyer decides whether to purchase a product or leave the market. Given remaining capacities, firms trade off selling today against shifting demand to competitors to obtain future market power. We provide conditions for the existence and uniqueness of pure-strategy Markov perfect equilibria. In the continuous-time limit, prices solve a system of ordinary differential equations. We derive properties of equilibrium dynamics and show that prices increase the most when the product with the lowest remaining capacity sells. Because firms do not fully internalize the social option value of future sales, equilibrium prices can be inefficiently low such that both firms and consumers would benefit if firms could commit to higher prices. We term this new welfare effect the Bertrand scarcity trap.
Recommended Citation
Betancourt, Jose M.; Hortaçsu, Ali; Öry, Aniko; and Williams, Kevin R., "Dynamic Price Competition with Capacity Constraints" (2024). Cowles Foundation Discussion Papers. 2798.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2798