A model of price-setting in regional duopolies based on consumer loyalty: theory and evidence from the Austrian newspaper industry

This paper extends a model by Deneckere et al. (J Ind Econ 40:147–156, 1992 ) to a multi-regional framework. It is assumed that some consumers are loyal to their respective regional firms, while others prefer the nationwide firm’s product. A third type of consumers is sensitive to price. With simultaneous price-setting, it is profitable to undercut or to set the consumers’ reservation price depending on the relative group sizes. With each type of leader–follower game, all firms set the reservation price. In this case, the most profitable scenario for the nationwide firm is to act as a price follower. The model is illustrated by the Austrian newspaper industry, represented by a nationwide firm that enjoys a national market share of over 50 per cent but nevertheless faces strong competition from regional producers in most regional markets. Actual price-setting behaviour is documented and interpreted for the observation period 1979–2003. It is shown that (i) the regional firms’ prices were identical to the nationwide firm’s most of the time, (ii) the nationwide firm almost always acted as a price follower, and (iii) a particular market entrant’s aggressive undercutting was an inept strategy. Copyright Springer-Verlag Berlin Heidelberg 2014