Price Competition in Markets with Customer Testing: The Captive Customer Effect
AbstractWe introduce product differentiation into the analysis of price competition in markets where suppliers test customers in order to assess whether they will pay for received goods or services. We find that, if the degree of differentiation is sufficiently high, suppliers may improve the average probability that their clientele will pay by charging higher prices. This helps suppliers to sustain high prices in equilibrium. Moreover, endogenizing locations in product space, we demonstrate that the high price level can be implemented in a pure-strategy subgame-perfect equilibrium with a high degree of differentiation. This is in contrast to the original Hotelling model with linear travel costs where a pure-strategy subgame-perfect equilibrium fails to exist.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6229.
Date of creation: Apr 2007
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Other versions of this item:
- Heidrun Hoppe & Ulrich Lehmann-Grube, 2008. "Price competition in markets with customer testing: the captive customer effect," Economic Theory, Springer, vol. 35(3), pages 497-521, June.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-28 (All new papers)
- NEP-COM-2007-04-28 (Industrial Competition)
- NEP-CSE-2007-04-28 (Economics of Strategic Management)
- NEP-IND-2007-04-28 (Industrial Organization)
- NEP-MIC-2007-04-28 (Microeconomics)
- NEP-MKT-2007-04-28 (Marketing)
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