Strategic Pricing with Customer Rationing: The Case of Primary Metals

Firms in primary-metal industries often charge subcompetitive prices and, in periods of high demand, they may ration their customers. A model is developed to explain these empirical regularities. In the model, firms with market power are aware that the price they charge today affects their demand tomorrow. In addition, the strategic interactions among firms reinforces this intertemporal effect. In the equilibrium of the two-state game, oligopolists can price below marginal cost. And, when capacity constraints are introduced, the equilibrium can involve rationing. Model predictions are assessed using market-structure and technology data for several primary-metal industries.