Product availability as a strategic variable:
The implications of regulating retailer stockouts
by Barbara G. Katz and Joel Owen
Abstract
We study product availability as a strategic variable in a sequential game between consumers and a monopolist. We use a perfect Bayesian equilibrium concept to solve the game under different regulatory regimes. We show that under certain assumptions about the regulatory environment, a two-price equilibrium in which the quantity of the lower-priced good is limited may exist even when a single retailer sells two brands that are perfect substitutes. The FTC Guides Against Bait Advertising are shown to be potentially welfare enhancing as they facilitate commitment on the part of a monopolist credibly to plan for stockouts. Paradoxically, our analysis suggests that the more stringent FTC regulation prohibiting stockouts by retail food stores from 1971 to 1988 was Pareto worsening, as it removed the monopolist's commitment mechanism.