Monday, October 29, 2018

Oligopoly Price Discrimination: The Role of Inventory Controls

James D. Dana Jr. (Northwestern University) and Kevin R. Williams (Cowles Foundation, Yale University) determine Oligopoly Price Discrimination: The Role of Inventory Controls.

ABSTRACT: Inventory controls, used most notably by airlines, are sales limits assigned to individual prices. While typically viewed as a tool to manage demand uncertainty, we argue that inventory controls also facilitate intertemporal price discrimination. In our model, competing ?rms ?rst choose quantity and then choose prices in a series of advance-purchase markets. When demand becomes more inelastic over time, as in the airline and hotel markets, a monopolist can easily price discriminate; however, we show that oligopoly ?rms generally cannot. Inventory controls let ?rms set increasing prices regardless of whether or not demand is uncertain.

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