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Price patterns in an oligopoly with switching cost and uncertain demand

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  • Mateusz Zawisza

    ()

  • Bogumil Kaminski

    ()

Abstract

We investigate the characteristics of price patterns in an oligopoly market with costs for switching a provider. We consider two regimes of a company’s access to information. In the benchmark scenario, firms make decisions based on perfect information about demand. In the second – more realistic scenario – they conduct market research to estimate an unknown demand curve and therefore face uncertainty regarding their profit function, which in turn leads to sub-optimal decision making. We inspect how (1) a company’s access to information on demand, (2) costs for switching a provider and (3) the rate of market renewal, influence price patterns on the market. We show that a positive switching cost is a sufficient condition for price dispersion, as well as imperfect information about the company's profit function, e.g. from market research. We conclude that (1) the average price under the perfect information regime is lower than under market research based price setting, (2) a higher switching cost makes it easier for companies to coordinate their prices and (3) a higher rate of market renewal softens the influence of the switching cost on market price.

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Bibliographic Info

Article provided by Wroclaw University of Technology, Institute of Organization and Management in its journal Operations Research and Decisions.

Volume (Year): 3 (2013)
Issue (Month): ()
Pages: 71-89

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Handle: RePEc:wut:journl:v:3:y:2013:p:71-89:id:1089

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Keywords: price competition; switching cost; agent-based modeling; uncertain demand; price volatility;

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  1. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
  2. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
  3. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  4. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  5. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, September.
  6. Vega-Redondo,Fernando, 2003. "Economics and the Theory of Games," Cambridge Books, Cambridge University Press, number 9780521775908.
  7. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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