Strategic Buying to Prevent Seller Exit

Authors


  • We thank Samuel Clark, Ig Horstmann, Nicolas Sahuguet, two anonymous reviewers for this journal, and especially the coeditor for helpful comments and suggestions. C. R. C. thanks CIRPEE for research funding.

Abstract

We consider a dynamic oligopoly model in which a seller may drop out of the market when demand for its product is insufficient in the first period. Buyers suffer some disutility if a seller exits the market and so their first-period purchase decision not only depends on current period preferences and prices, but also on the potential effect that their behavior has on the probability of seller survival. Specifically, some buyers may choose to purchase from the seller with the lower survival probability even though they like the other seller's product better, a behavior that we call “strategic buying.” We analyze how the incidence of strategic buying depends on parameters and also the implications of the strategic buying motive for sellers' first-period pricing decisions.

Ancillary