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Price Competition in Markets with Consumer Variety Seeking

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  • P. B. Seetharaman

    ()
    (Jones Graduate School of Management, Rice University, Houston, Texas 77252)

  • Hai Che

    ()
    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

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    Abstract

    We investigate price competition between firms in markets characterized by consumer variety seeking. While previous research has addressed the effect of consumer inertia on prices, there exists no research on the effects of variety seeking on price competition. Our study fills this gap in the literature. Using a two-period duopoly framework as in Klemperer's analysis of inertial markets, we show that the noncooperative pricing equilibrium in a market with consumer variety seeking may be the same as the collusive outcome in an otherwise identical market without variety seeking. Specifically, our variety-seeking model implies tacit collusion between firms in periods, unlike the inertia model of Klemperer that implies tacit collusion between firms only in the period but implies fierce price competition in the first period. When consumers are assumed to have rational expectations about future prices, the implied first-period prices increase further, which is consistent with what Klemperer finds in an inertial market. To summarize, while our variety-seeking analyses support two key results (pertaining to second-period prices and rational expectations) previously derived for inertial markets by Klemperer, they depart from one key result (pertaining to first-period prices).

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    File URL: http://dx.doi.org/10.1287/mksc.1080.0434
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 28 (2009)
    Issue (Month): 3 (05-06)
    Pages: 516-525

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    Handle: RePEc:inm:ormksc:v:28:y:2009:i:3:p:516-525

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    Related research

    Keywords: variety seeking; pricing; oligopoly; staying cost; attribute satiation;

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    Cited by:
    1. Zhao, Li & Tian, Peng & Xiangyong Li, 2012. "Dynamic pricing in the presence of consumer inertia," Omega, Elsevier, vol. 40(2), pages 137-148, April.
    2. Ribeiro, Ricardo, 2010. "Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies," MPRA Paper 25812, University Library of Munich, Germany.

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