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Dynamic Price Competition with Persistent Consumer Tastes

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  • Toker Doganoglu

    (University of Kiel)

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    Abstract

    The dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium(MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there is no persistence in consumer tastes. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.

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    File URL: http://fmwww.bc.edu/RePEc/es2000/1442.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1442.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1442

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    1. Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series, MIT Center for Coordination Science 158, MIT Center for Coordination Science.
    2. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 436, C.E.P.R. Discussion Papers.
    3. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
    4. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
    5. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
    6. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
    7. Maskin, Eric & Tirole, Jean, 1987. "A theory of dynamic oligopoly, III : Cournot competition," European Economic Review, Elsevier, Elsevier, vol. 31(4), pages 947-968, June.
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    Cited by:
    1. Laussel, Didier & de Montmarin, Maxime & Van Long, Ngo, 2004. "Dynamic duopoly with congestion effects," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(5), pages 655-677, May.

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