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Dynamic competition with consumer inertia

Listed author(s):
  • Pot, Erik
  • Flesch, János
  • Peeters, Ronald
  • Vermeulen, Dries

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. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, 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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File URL: http://www.sciencedirect.com/science/article/pii/S0304406813000682
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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 49 (2013)
Issue (Month): 5 ()
Pages: 355-366

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Handle: RePEc:eee:mateco:v:49:y:2013:i:5:p:355-366
DOI: 10.1016/j.jmateco.2013.07.004
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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  1. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
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  13. 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.
  14. 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).
  15. Radner, Roy, 2003. "Viscous demand," Journal of Economic Theory, Elsevier, vol. 112(2), pages 189-231, October.
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