Dynamic Competition with Consumer Inertia

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Dynamic Competition with Consumer Inertia

Author Info

Pot Erik
Flesch János
Peeters Ronald
Vermeulen Dries (METEOR)

Abstract

We study a framework where two duopolists compete repeatedly in prices and where cho-sen prices potentially affect future market shares, but certainly do not affect current sales.This assumption of consumer inertia causes (noncooperative) coordination on high pricesonly to be possible as an equilibrium for low values of the discount factor. In particular,high discount factors increase opportunism and aggressiveness of competition to such anextent that high prices are no longer sustainable as an equilibrium outcome (not even intrigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena withoutrequiring exogenous shocks in market or firm characteristics.

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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 037.

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Date of creation: 2009
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Handle: RePEc:dgr:umamet:2009037

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Keywords: microeconomics ;

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-10-17 (All new papers)
NEP-BEC-2009-10-17 (Business Economics)
NEP-CBA-2009-10-17 (Central Banking)
NEP-MAC-2009-10-17 (Macroeconomics)
NEP-OPM-2009-10-17 (Open MacroEconomics)

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