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Newsboy Duopoly with Asymmetric Information

Korpeoglu, Evren; Sen, Alper; Guler, Kemal
HP Laboratories


Keyword(s): Competitive newsboy problem, asymmetric information, inventory competition, game theory

Abstract: We study the newsboy duopoly problem under asymmetric cost information. We extend the Lippman and McCardle (1997) model of competitive newsboys to allow for private cost information. The market demand is initially split between two firms and the excess demand for each firm is reallocated to the rival firm. We show the existence and uniqueness of a pure strategy equilibrium and characterize its structure. The equilibrium conditions have an interesting recursive structure that enables an easy computation of the equilibrium order quantities. Presence of strategic interactions creates incentives to increase order quantities for all firm types except the type that has the highest possible unit cost, who orders the same quantity as he would as a monopolist newsboy. Consequently, competition leads to higher total inventory in the industry. A firm's equilibrium order quantity increases with a stochastic increase in the total industry demand or with an increase in his initial allocation of the total industry demand. Finally, we provide full characterization of the equilibrium, corresponding payoffs and comparative statics, for a parametric special case with uniform demand and linear market shares.

30 Pages

Additional Publication Information: Submitted to Operations Research

External Posting Date: October 21, 2008 [Fulltext]. Approved for External Publication
Internal Posting Date: October 21, 2008 [Fulltext]

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