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Price competition and innovation in markets with brand loyalty

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  • Robert Schmidt

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Abstract

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

Suggested Citation

  • Robert Schmidt, 2013. "Price competition and innovation in markets with brand loyalty," Journal of Economics, Springer, vol. 109(2), pages 147-173, June.
  • Handle: RePEc:kap:jeczfn:v:109:y:2013:i:2:p:147-173
    DOI: 10.1007/s00712-012-0296-2
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    File URL: http://hdl.handle.net/10.1007/s00712-012-0296-2
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    References listed on IDEAS

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    Cited by:

    1. Isabel Abinzano & Luis Muga & Rafael Santamaria, 2016. "The Role of Investor Type in the Fee Structures of Pension Plans," Journal of Financial Services Research, Springer;Western Finance Association, vol. 50(3), pages 387-417, December.
    2. Olga Slivko & Bernd Theilen, 2014. "Innovation or imitation? The effect of spillovers and competitive pressure on firms’ R&D strategy choice," Journal of Economics, Springer, vol. 112(3), pages 253-282, July.

    More about this item

    Keywords

    Switching cost; Market share; Customer base; Consumer lock-in; Mixed-strategy equilibrium; D43; L11; L21;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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