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Conditional loyalty and its implications for pricing

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  • De Francesco, Massimo A.

Abstract

Bertrand-Edgeworth competition has recently been analyzed under imperfect buyer mobility, as a game in which, once prices are chosen, a static buyer subgame (BS) is played where the buyers choose which seller to visit (see, e.g., Burdett et al, 2001). Our paper considers a symmetric duopoly where two buyers play a two-stage BS of imperfect information after price setting. With prices sufficiently close, an equilibrium of the BS is characterized in which the buyers keep loyal if previously served. Conditional loyalty is proved to increase the firms' market power: at the corresponding subgame perfect equilibrium of the entire game, the price is higher than that corresponding to the equilibrium of the BS in which the buyers are persistently randomizing.

Suggested Citation

  • De Francesco, Massimo A., 2018. "Conditional loyalty and its implications for pricing," MPRA Paper 91671, University Library of Munich, Germany, revised 26 Nov 2018.
    • Handle: RePEc:pra:mprapa:91671
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    References listed on IDEAS

    as
    1. Athanasios Geromichalos, 2014. "Directed Search And The Bertrand Paradox," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 1043-1065, November.
    2. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    3. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring.
    4. repec:ebl:ecbull:v:3:y:2005:i:31:p:1-10 is not listed on IDEAS
    5. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    6. Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-1127, September.
    7. Massimo A. De Francesco, 2005. "Matching buyers and sellers," Economics Bulletin, AccessEcon, vol. 3(31), pages 1-10.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Keywords: Bertrand-Edgeworth competition; matching; imperfect buyer mobility; conditional loyalty; assessment equilibrium. JEL Classification Codes: D430; L130.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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