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Dynamic Competition with Consumer Inertia

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  • 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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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 037.

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

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Keywords: microeconomics ;

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References

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  1. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6687, C.E.P.R. Discussion Papers.
  2. Paul Klemperer & Joseph Farrell, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Economics Series Working Papers, University of Oxford, Department of Economics 2006-W07, University of Oxford, Department of Economics.
  3. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers, UCLA Department of Economics 658612000000000081, UCLA Department of Economics.
  4. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer.
  5. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, Elsevier, vol. 118(1), pages 32-60, September.
  6. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, Elsevier, vol. 100(2), pages 191-219, October.
  8. Radner, Roy & Richardson, Thomas J., 2003. "Monopolists and viscous demand," Games and Economic Behavior, Elsevier, Elsevier, vol. 45(2), pages 442-464, November.
  9. Bos Iwan & Peeters Ronald & Pot Erik, 2012. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 047, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  10. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  11. Kenneth Burdett and Melvyn G. Coles, . "Steady State Price Distributions in a Noisy Search Equilibrium," Economics Discussion Papers, University of Essex, Department of Economics 450, University of Essex, Department of Economics.
  12. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, Econometric Society, vol. 60(3), pages 651-66, May.
  13. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, Elsevier, vol. 109(1), pages 24-38, March.
  14. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 390-407, June.
  15. Radner, Roy, 2003. "Viscous demand," Journal of Economic Theory, Elsevier, Elsevier, vol. 112(2), pages 189-231, October.
  16. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  17. Pot, Erik & Peeters, Ronald & Peters, Hans & Vermeulen, Dries, 2008. "Noncooperative Collusion and Price Wars with Individual Demand Fluctuations," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 017, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  18. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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Cited by:
  1. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2010. "Intentional Price Wars on the Equilibrium Path," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 028, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Bos Iwan & Peeters Ronald & Pot Erik, 2010. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 024, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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