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Price competition and innovation in markets with brand loyalty

Listed author(s):
  • Robert Schmidt

    ()

Intuition suggests that in markets with consumer lock-in (‘brand loyalty’), firms with a large customer base earn higher profits. We show for a homogeneous goods duopoly that the intuition can be misleading, as the intensity of price competition depends on the initial market split. We derive mixed-strategy equilibria, and show that competition is often most intense when the market is split evenly. As a result, firms coordinate on an asymmetric split when consumers are not yet attached to firms. We also allow for asymmetric costs, and analyze when firms with a larger customer base are more eager to innovate. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s00712-012-0296-2
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Article provided by Springer in its journal Journal of Economics.

Volume (Year): 109 (2013)
Issue (Month): 2 (June)
Pages: 147-173

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Handle: RePEc:kap:jeczfn:v:109:y:2013:i:2:p:147-173
DOI: 10.1007/s00712-012-0296-2
Contact details of provider: Web page: http://www.springer.com

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  1. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-748, September.
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  9. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 83-105, January.
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  12. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
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