Scholarship (Affiliate)
Capacity-Constrained Competition In Rental Markets
Abstract
We build a Markov state-space model of competition in rental industries among firms facing capacity constraints and uncertain demand. In the model, consumers randomly arrive, choose among available options, and then randomly depart. In this setting, spare capacity acts like inventory that can be sold immediately or held for later. We compute subgame perfect equilibrium and show that when occupancy is high, expanding output becomes costly. When one firm raises price, its rivals can pick up only a little of its lost output, so there is little change to the firm’s post-merger profit calculus. This reduces both its incentive to merge or collude and the magnitude of any price increase if it does.
Read the full piece at SSRN.