A General Equilibrium Model for Retail Industries with Price and Service Competition

Thursday, September 26, 2002 - 9:30am - 10:20am
Keller 3-180
Awi Federgruen (Columbia University)
Joint work with Fernando Bernstein (Fuqua School of Business Duke University Durham, NC 27708).

This paper develops a stochastic general equilibrium inventory model for an oligopoly, in which all inventory constraint parameters are endogenously determined. We propose several systems of demand processes whose distributions are functions of all retailers' prices and all retailers' service levels. We proceed with the investigation of the equilibrium behavior of infinite horizon models for industries facing this type of generalized competition, under demand uncertaintly.

We systematically consider the following three competition scenarios. (I) price competition only: here, we assumethat the firms' service levels are exogenously specified but characterize how the price and inventory strategy equilibrium varies with the chosen service levels. (II) simultaneous price and service level competition: here, each of the firms simultaneously chooses a service level and a combined price and inventory strategy. (III) two-stage competition: the firms make their competitive choices sequentially; in a first stage, all firms simultaneously choose a service level; in a second stage, the firms simultaneously choose a combined pricing and inventory strategy with full knowledge of the service levlels selected by all competitors.