Price Competition in Markets with Consumer Variety Seeking
We investigate price competition between firms in markets characterized by consumer variety seeking. While previous research has addressed the effect of consumer inertia on prices, there exists no research on the effects of variety seeking on price competition. Our study fills this gap in the literature. Using a two-period duopoly framework as in Klemperer's analysis of inertial markets, we show that the noncooperative pricing equilibrium in a market with consumer variety seeking may be the same as the collusive outcome in an otherwise identical market without variety seeking. Specifically, our variety-seeking model implies tacit collusion between firms in periods, unlike the inertia model of Klemperer that implies tacit collusion between firms only in the period but implies fierce price competition in the first period. When consumers are assumed to have rational expectations about future prices, the implied first-period prices increase further, which is consistent with what Klemperer finds in an inertial market. To summarize, while our variety-seeking analyses support two key results (pertaining to second-period prices and rational expectations) previously derived for inertial markets by Klemperer, they depart from one key result (pertaining to first-period prices).
Volume (Year): 28 (2009)
Issue (Month): 3 (05-06)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Moshe Givon, 1984. "Variety Seeking Through Brand Switching," Marketing Science, INFORMS, vol. 3(1), pages 1-22.
- James M. Lattin, 1987. "A Model of Balanced Choice Behavior," Marketing Science, INFORMS, vol. 6(1), pages 48-65.
- Kapil Bawa, 1990. "Modeling Inertia and Variety Seeking Tendencies in Brand Choice Behavior," Marketing Science, INFORMS, vol. 9(3), pages 263-278.
- Z. John Zhang & Aradhna Krishna & Sanjay K. Dhar, 2000. "The Optimal Choice of Promotional Vehicles: Front-Loaded or Rear-Loaded Incentives?," Management Science, INFORMS, vol. 46(3), pages 348-362, March.
- Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
- Rishin Roy & Pradeep K. Chintagunta & Sudeep Haldar, 1996. "A Framework for Investigating Habits, “The Hand of the Past,” and Heterogeneity in Dynamic Brand Choice," Marketing Science, INFORMS, vol. 15(3), pages 280-299.
- Pradeep K. Chintagunta & Vithala R. Rao, 1996. "Pricing Strategies in a Dynamic Duopoly: A Differential Game Model," Management Science, INFORMS, vol. 42(11), pages 1501-1514, November.
- Yuxin Chen & Ganesh Iyer, 2002. "Research Note Consumer Addressability and Customized Pricing," Marketing Science, INFORMS, vol. 21(2), pages 197-208, November.
- McAlister, Leigh, 1982. " A Dynamic Attribute Satiation Model of Variety-Seeking Behavior," Journal of Consumer Research, Oxford University Press, vol. 9(2), pages 141-150, September.
- Alessandro Acquisti & Hal R. Varian, 2005.
"Conditioning Prices on Purchase History,"
INFORMS, vol. 24(3), pages 367-381, May.
- Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
- Tülin Erdem, 1996. "A Dynamic Analysis of Market Structure Based on Panel Data," Marketing Science, INFORMS, vol. 15(4), pages 359-378.
- John W. Walsh, 1995. "Flexibility in Consumer Purchasing for Uncertain Future Tastes," Marketing Science, INFORMS, vol. 14(2), pages 148-165.
- J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
- McAlister, Leigh & Pessemier, Edgar, 1982. " Variety Seeking Behavior: An Interdisciplinary Review," Journal of Consumer Research, Oxford University Press, vol. 9(3), pages 311-322, December.
- Ratner, Rebecca K & Kahn, Barbara E & Kahneman, Daniel, 1999. " Choosing Less-Preferred Experiences for the Sake of Variety," Journal of Consumer Research, Oxford University Press, vol. 26(1), pages 1-15, June.
- Liang Guo, 2006. "Consumption Flexibility, Product Configuration, and Market Competition," Marketing Science, INFORMS, vol. 25(2), pages 116-130, 03-04.
- Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
- Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
- McAlister, Leigh, 1979. " Choosing Multiple Items from a Product Class," Journal of Consumer Research, Oxford University Press, vol. 6(3), pages 213-224, December.
- P. B. Seetharaman, 2004. "Modeling Multiple Sources of State Dependence in Random Utility Models: A Distributed Lag Approach," Marketing Science, INFORMS, vol. 23(2), pages 263-271, April.
- Birger Wernerfelt, 1991. "Brand Loyalty and Market Equilibrium," Marketing Science, INFORMS, vol. 10(3), pages 229-245.
- Simonson, Itamar & Winer, Russell S, 1992. " The Influence of Purchase Quantity and Display Format on Consumer Preference for Variety," Journal of Consumer Research, Oxford University Press, vol. 19(1), pages 133-138, June.
- Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:28:y:2009:i:3:p:516-525. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.