This paper models localized competition between firms when there is consumer lock-in or loyalty. We derive the symmetric equilibrium mixed strategy price distribution under two alternative models, and compare them to symmetric equilibrium strategies under non-localized competition. Contrary to the conventional wisdom in the product differentiation literature, expected prices are lower with localized competition. The analysis questions the robustness of models of product differentiation which ignore consumer lock-in.
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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number
1286.
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Michael R. Baye & John Morgan, 2005.
"Brand and Price Advertising in Online Markets,"
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2005-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
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