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Habit Formation and Oligopolistic Competition

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  • Alejandro Tatsuo Moreno

    ()
    (Department of Economics and Finance, Universidad de Guanajuato)

Abstract

In this paper I introduce competition in the habit formation literature by extending the idea of habit formation to the characteristics of the products. I model a two-period game in which two rms can enter a market and compete with each other, and individuals’ favorite characteristics in the second period are the characteristics of the product they consumed in the rst period. I nd that if two rms enter the market, they do it sequentially. That is, one rm enters in the rst period and attracts individuals’ preferences to the characteristics of its product, while the other rm enters in the second period and competes for the individuals that have grown to prefer the characteristics of the original product. However, the second rm’s product is similar to the original one, but not exactly the same. The model also applies to habit formation for different markets with characteristics in common. For example, sweetness is a common characteristic of sodas and ice-cream, and consumption of a product in one market affects the preferences for products in the other market. I nd that new rms produce products with similar characteristics not only to a product that has entered the same market, but to products that have entered other markets with characteristics in common. I apply my model to durable goods and nd a new explanation for fashion: rms can take advantage of habit formation by showing their products in the media to generate demand for new durable goods.

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File URL: http://economia.ugto.org/WorkingPapers/EC200703.pdf
File Function: Revised version, 2008
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Bibliographic Info

Paper provided by Universidad de Guanajuato, Department of Economics and Finance in its series Department of Economics and Finance Working Papers with number EC200703.

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Length: 32 pages
Date of creation: Dec 2007
Date of revision: May 2008
Handle: RePEc:gua:wpaper:ec200703

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  1. Fehr, Ernst & Schmidt, Klaus M., 1998. "A Theory of Fairness, Competition and Cooperation," CEPR Discussion Papers 1812, C.E.P.R. Discussion Papers.
  2. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
  3. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
  4. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  5. Dufwenberg, Martin & Kirchsteiger, Georg, 2000. "Reciprocity and wage undercutting," European Economic Review, Elsevier, vol. 44(4-6), pages 1069-1078, May.
  6. Matthew Rabin., 1997. "Fairness in Repeated Games," Economics Working Papers 97-252, University of California at Berkeley.
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Cited by:
  1. Alejandro Tatsuo Moreno Okuno, 2010. "Price competition in mixed strategies in markets with habit formationPrice competition in mixed strategies in markets with habit formation," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 7(1), pages 69-95, Julio - D.

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