Tuesday, February 26, 2019

Oligopoly Price Discrimination: The Role of Inventory Controls

James D. Dana Jr. (Northwestern University); Kevin R. Williams (Cowles Foundation, Yale University) explain 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 can also facilitate intertemporal price discrimination in oligopoly. In our model, competing firms first choose quantity and then choose prices in a series of advance-purchase markets. When demand becomes less elastic over time, as is the case in airline markets, a monopolist can easily price discriminate; however, we show that oligopoly firms generally cannot. We also show that using inventory controls allows oligopoly firms to set increasing prices, regardless of whether or not demand is uncertain.


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