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Market share dynamics in a duopoly model with word-of-mouth communication

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  • Kováč, Eugen
  • Schmidt, Robert C.

Abstract

We analyze dynamic price competition in a homogeneous goods duopoly, where consumers exchange information via word-of-mouth communication. A fraction of consumers, who do not learn any new information, remain locked-in at their previous supplier in each period. We analyze Markov perfect equilibria in which firms use mixed pricing strategies. Market share dynamics are driven by the endogenous price dispersion. Depending on the parameters, we obtain different ‘classes’ of dynamics. When firms are impatient, there is a tendency towards equal market shares. When firms are patient, there are extended intervals of market dominance, interrupted by sudden changes in the leadership position.

Suggested Citation

  • Kováč, Eugen & Schmidt, Robert C., 2014. "Market share dynamics in a duopoly model with word-of-mouth communication," Games and Economic Behavior, Elsevier, vol. 83(C), pages 178-206.
  • Handle: RePEc:eee:gamebe:v:83:y:2014:i:c:p:178-206
    DOI: 10.1016/j.geb.2013.11.010
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    Cited by:

    1. Deng, Yiting & Staelin, Richard & Wang, Wei & Boulding, William, 2018. "Consumer sophistication, word-of-mouth and “False” promotions," Journal of Economic Behavior & Organization, Elsevier, vol. 152(C), pages 98-123.
    2. Daniel Garcia & Sandro Shelegia, 2018. "Consumer search with observational learning," RAND Journal of Economics, RAND Corporation, vol. 49(1), pages 224-253, March.

    More about this item

    Keywords

    Dynamic duopoly; Homogeneous goods; Price competition; Consumer lock-in; Mixed pricing; Markov perfect equilibrium;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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