Revenue Management with Competition
*Paper joint with Jose Betancourt, Ali Hortacsu and Kevin Williams
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 based on their remaining inventories. Over time, randomly arriving buyers decide whether to purchase from the set of available products or take their outside options. We provide conditions for the existence and uniqueness of Markov perfect equilibria and show that in the continuous-time limit, prices and profits solve a system of ordinary differential equations. Equilibrium dynamics are rich because firms may try to get their rivals to sell out first. Competition can lead to inefficiently low prices that do not fully internalize the arrival of future buyers. We call this effect the Bertrand Scarcity Trap.
*An old version of the paper (with a more heavy emphasis on the empirical insights) is linked