Department of Economics
University of Delaware
Working Paper #2006-01
Endogenously determined Quality and Price In a Two-Sector Competitive Service Market With an Application to Down-Hill Skiing
James G MulliganABSTRACT
This paper illustrates the importance of the role of long-run capacity constraints in a model explaining the effect of real income and transportation cost on long-run lift-ticket prices and lift capacity in a competitive two-sector ski industry. Despite the large number of game-theoretic models in the literature linking excess capacity to higher prices and limited entry, the model explains large increases in capacity and real prices over time despite a static number of skier-days per year without having to resort to an argument based on market power. This approach, thus, has points in common with work by Sutton (1991 and 1998) on endogenous vertical differentiation and persistent market concentration. The distinguishing feature of this paper, however, is that it links endogenous changes in service capacity directly to changes in both quality and price.