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Competition with price similarities

Author

Listed:
  • Benjamin Bachi

    (Tel Aviv University
    Max Planck Institute for Research on Collective Goods)

Abstract

A duopolistic market is analyzed in which firms engage in price competition over consumers who respond only to large price differences. When prices are approximately the same, consumers randomize. It is shown that the market has an equilibrium with bounded support if, and only if, consumers’ sensitivity to price differences is sufficiently high. If an equilibrium exists, then it is unique, firms play a mixed pricing strategy, their profits are positive, and consumers pay, with probability 1, a price that is higher than marginal cost. Moreover, the less sensitive consumers are to price differences, the higher are the firms’ profits.

Suggested Citation

  • Benjamin Bachi, 2016. "Competition with price similarities," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(2), pages 277-290, October.
    • Handle: RePEc:spr:etbull:v:4:y:2016:i:2:d:10.1007_s40505-015-0086-4
    DOI: 10.1007/s40505-015-0086-4
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bachi, Benjamin & Spiegler, Ran, 2018. "Buridanic competition," Games and Economic Behavior, Elsevier, vol. 107(C), pages 298-315.
    2. Edward J. D. Webb, 2017. "If It’s All the Same to You: Blurred Consumer Perception and Market Structure," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(1), pages 1-25, February.
    3. Ran Spiegler, 2014. "Competitive Framing," American Economic Journal: Microeconomics, American Economic Association, vol. 6(3), pages 35-58, August.
    4. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    5. Schmitt, Stefanie Y., 2022. "Competition with limited attention to quality differences," BERG Working Paper Series 184, Bamberg University, Bamberg Economic Research Group.
    6. Balart, Pau, 2021. "Semiorder preferences and price-oriented buyers in a Hotelling model," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 394-407.

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    More about this item

    Keywords

    Similarity; Consumer behavior; Price competition; Bounded rationality;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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