Competition in price and availability when availability is unobservable

I present a strategic model of competition in price and availability in whi ch demand is uncertain and consumers choose where to shop given firms' obse rvable prices and their expectations of firms' unobservable inventories. In both a single-period Cournot model (inventories are chosen first) and a si ngle-period Bertrand model (prices are chosen first), I show that firms use higher prices to "signal" higher availability. This creates a floor on equ ilibrium prices and industry profits regardless of the number of firms. The model is useful in understanding the relationship between price and availa bility in the video rental industry.