Product Disposal: A Market Competition Perspective

Discussion Papers

No.781

by Hitoshi Sato

April 2020

ABSTRACT

This paper examines the effect of competition among firms on their decisions about the pre-committed production (sales capacities), sales quantities, and product disposal in a duopoly model with demand uncertainty. A complete set of parameter configurations with which one of the following three cases emerges is identified: (i) neither capacity expansion nor product disposal occurring regardless of demand realization; (ii) only capacity expansion occurring when high demand is realized; and (iii) only product disposal occurring when low demand is realized. The flexibility in capacity constraints reduces the likelihood of product disposal. Duopolistic competition increases the likelihood that either capacity expansion or product disposal occurs. In addition, duopolistic competition leads to either higher or lower disposal intensities (product disposal per output) depending on the relative size of demand variability to production costs.

Keywords: Product disposal, capacity-price competition

JEL classification: D21, L13, Q02

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