Intertemporal Price Discrimination in Sequential Quantity-Price Games

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This paper develops an oligopoly model in which firms first choose capacity and then compete in prices in a series of advance-purchase markets. We show that the existence of multiple sales opportunities creates strong competitive forces that prevent firms from utilizing intertemporal price discrimination. We then show that intertemporal price discrimination is possible but only when firms adopt inventory controls (sales limit restrictions) and demand becomes more inelastic over time. Therefore, we show that in addition to being useful to manage demand uncertainty, inventory controls are also a tool to soften price competition. We discuss model extensions, including product differentiation, aggregate demand uncertainty, and longer sales horizons.

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