We consider quantity competition between two firms offering fully substitutable products to strategic consumers, who are forward looking and may forgo regular season purchase to chase discounted price in the clearance season. We show that horizontal centralization (monopolization) is an effective way to counteract the negative impact of strategic consumers on industry profit. Another widely-recognized instrument to deal with strategic consumer is quantity commitment, with which firms have the ability to commit some inventory level in advance. Our results highlight the comparison between these two instruments. Quantity commitment is more powerful than horizontal centralization in enhancing industry profit, unless consumers' strategic level is less than some threshold and they he...[ Read more ]

We consider quantity competition between two firms offering fully substitutable products to strategic consumers, who are forward looking and may forgo regular season purchase to chase discounted price in the clearance season. We show that horizontal centralization (monopolization) is an effective way to counteract the negative impact of strategic consumers on industry profit. Another widely-recognized instrument to deal with strategic consumer is quantity commitment, with which firms have the ability to commit some inventory level in advance. Our results highlight the comparison between these two instruments. Quantity commitment is more powerful than horizontal centralization in enhancing industry profit, unless consumers' strategic level is less than some threshold and they hence are not responsive to firms' commitment. When applied together, the two instruments, horizontal centralization and quantity commitment, are strategic substitutes except for a special parameter space with high-margin products. Furthermore, we show that the industry profit increment resulting from horizontal centralization is not monotone in consumers' strategic level, and attains maximum when consumers' strategic level is intermediate, due to an interaction between operational and behavioral value. Interestingly, in an extension to heterogeneous consumer, we find that the industry profit increment resulting from horizontal centralization reaches minimum, when strategic consumers take an intermediate proportion in the population such that both centralized (monopolistic) and decentralized (competitive) sellers choose to forgo the market of strategic consumers.