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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 chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only 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 an extent that high prices are no longer sustainable as an equilibrium outcome (not even in trigger strategies). In addition, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring 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 016.

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Date of creation: 2011
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Handle: RePEc:unm:umamet:2011016

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Keywords: microeconomics ;

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References

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  1. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2002. "Collusion and price rigidity," Discussion Papers 0102-38, Columbia University, Department of Economics.
  2. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers.
  3. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers.
  4. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
  5. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  6. Radner, Roy & Richardson, Thomas J., 2003. "Monopolists and viscous demand," Games and Economic Behavior, Elsevier, vol. 45(2), pages 442-464, November.
  7. Kenneth Burdett and Melvyn G. Coles, . "Steady State Price Distributions in a Noisy Search Equilibrium," Economics Discussion Papers 450, University of Essex, Department of Economics.
  8. 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, vol. 62(4), pages 515-39, October.
  9. Robert H. Porter & J. Douglas Zona, 1997. "Ohio School Milk Markets: An Analysis of Bidding," NBER Working Papers 6037, National Bureau of Economic Research, Inc.
  10. Bos Iwan & Peeters Ronald & Pot Erik, 2012. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum 047, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  11. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, vol. 109(1), pages 24-38, March.
  12. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, vol. 118(1), pages 32-60, September.
  13. Pot, Erik & Peeters, Ronald & Peters, Hans & Vermeulen, Dries, 2008. "Noncooperative Collusion and Price Wars with Individual Demand Fluctuations," Research Memorandum 017, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  14. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  15. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  16. Radner, Roy, 2003. "Viscous demand," Journal of Economic Theory, Elsevier, vol. 112(2), pages 189-231, October.
  17. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  18. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
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Cited by:
  1. Bos Iwan & Peeters Ronald & Pot Erik, 2012. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum 047, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2010. "Intentional Price Wars on the Equilibrium Path," Research Memorandum 028, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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