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Storability, Market Structure and Demand-Shift Incentives

James J. Anton and Gopal Das Varma

RAND Journal of Economics 36(3): 520-543, 2005

Abstract: We consider a 2-period model in which buyers can store the good by purchasing in advance of consumption so as to realize potential gains from inter-temporal price arbitrage. We find that storability introduces a kink in the aggregate period-1 demand. When supply is oligopolistic (quantity setting) and consumers are sufficiently patient (storage cost is relatively low) then each firm has a strong current incentive to capture future market share from a rival. As a result, in equilibrium, the price path must be increasing and there is rational in-advance purchase by buyers. In contrast, the monopoly and perfectly competitive markets exhibit no such price dynamics. Intermediate storage costs result in multiple equilibria, with at least one that involves advance purchase and one that does not.