James D. Dana

Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure

When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.

Using Yield Management to Shift Demand When the Peak Time is Unknown

Traditional peak-load and stochastic peak-load models assume firms have prior information about when peak demand occurs. However, price dispersion, such as is typically used by firms practicing yield management, can achieve some of the same efficient demand shifting even when the peak time is unknown. Equilibrium price dispersion arises because of stochastic demand and price rigidities, but a previously unexplored benefit of price dispersion is its ability to reduce equilibrium capacity costs through demand shifting. The model also suggests how yield management (now more commonly called revenue management) might actually benefit business travellers, contrary to the popular prejudice.

Monopoly Price Dispersion under Demand Uncertainty

When a monopolist sets its price before its demand is known, then it may set more than one price and limit the availability of its output at lower prices. This article adds demand uncertainty and price rigidities to the standard model of monopoly pricing. When there are two states of demand and the ex post monopoly price is greater when demand is high then the monopolists optimal ex ante pricing strategy is to set two prices and limit purchases at the lower price.

Product Quality, Reputation, and Market Structure

In a repeated game in which firms simultaneously choose price and product quality, but quality is observed only after consumption takes place, equilibria exhibiting high quality may exist in oligopoly markets even when the low‐quality one is a unique equilibrium outcome in monopoly and competitive markets. Oligopolists can sustain high quality through the threat of both a loss of reputation and a breakdown in tacit collusion. While we abstract from other reasons that market structure might affect product quality, we show that the inverted‐U shaped relationship between feasible quality and market structure is robust to several generalizations of the model.

Remark on Appropriateness and Impact of Platform-Based Product Development

When platform-based manufacturing exhibits overdesign costs then platform adoption will lead to a decrease in product line differentiation. In contrast, Krishnan and Gupta (2001) argued that in the presence of overdesign costs and platform economies, platform production always leads to a more differentiated product family. While Krishnan and Gupta analyzed one particular parameterized cost function and define overdesign costs and platform economies narrowly in terms of their parameters, I propose a general definition of overdesign costs and show that platform adoption reduces product differentiation for all cost functions satisfying this definition, regardless of whether or not they exhibit platform economies.

Bundling and Firm Reputation

By bundling experience goods, a manufacturer can more easily maintain a reputation for high quality over time. Formally, we extend Klein and Leflers (1981) repeated moral hazard model of product quality to consider multi-product firms and imperfect private learning by consumers. When consumers are small, receive imperfect private signals of product quality, and have heterogeneous preferences over available products, then purchasing multiple products from the same firm makes consumers more effective monitors of the firms behavior. These consumers observe more signals of firm behavior and detect shirking with a higher probability, which creates stronger incentives for the firm to produce high quality products. By constraining all of the firms consumers to use more effective monitoring and punishment strategies, bundling creates an even stronger incentive for a multi-product firm to produce high quality products. The impact of bundling on incentives is even greater when consumers cannot identify which of the goods is responsible for poor overall product performance.

Bundling and Quality Assurance

We consider a repeated moral hazard model of product quality choice by a multiproduct firm selling experience goods with imperfect private monitoring. When consumers receive imperfect private signals of product quality, consuming two products from the same firm improves monitoring. Monitoring by consumers has a positive externality on other consumers, but consumers ignore this when making their purchase decisions. Product bundling improves product quality by constraining consumers to purchase both goods and monitor more effectively. The social and private value of bundling is even larger if (1) consumers can only attribute a negative signal to a pair of complementary products and not to a specific product, and (2) if one of the two goods is a durable and the other is a complementary nondurable.