Working Paper: CEPR ID: DP12963
Authors: Joo Montez; Nicolas Schutz
Abstract: We study a class of games where stores source unobservable inventories in advance, and then simultaneously set prices. Our framework allows for firm asymmetries, heterogeneity in consumer tastes, endogenous consumer information through advertising, and salvage values for unsold units. The payoff structure relates to a complete-information all-pay contest with outside options, non-monotonic winning and losing functions, and conditional investments. In the generically unique equilibrium, stores randomize their price choice and, conditional on that choice, serve all their targeted demand---thus, some inventories may remain unsold. As inventory costs become fully recoverable, the equilibrium price distribution converges to an equilibrium of the associated Bertrand game (where firms first choose prices and then produce to order). This suggests that with production in advance, the choice between a Cournot analysis and a Bertrand-type analysis, as properly generalized in this paper, should depend on whether or not stores observe rivals' inventories before setting prices.
Keywords: oligopoly; inventories; production in advance; allpay contests; bertrand convergence
JEL Codes: L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price setting (L11) | inventory management (M11) |
| recoverability of inventory costs (G31) | price competition (D41) |
| inventory choices (L81) | price setting (L11) |