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Conditional loyalty and its implications for pricing

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  • Massimo A. Francesco

    (University of Siena)

Abstract

Bertrand–Edgeworth competition has recently been analyzed under imperfect buyer mobility, as a game in which, once prices are chosen, a static buyer subgame (BS) is played where the buyers choose which seller to visit (see, e.g., Burdett et al. in J Political Econ 109:1060–1085, 2001). Our paper considers a symmetric duopoly where two buyers play a two-stage BS of imperfect information after price setting. An “assessment equilibrium” of the BS is shown to exist in which, with prices at the two firms sufficiently close to each other, the buyers keep loyal if previously served. Conditional loyalty is proved to increase the duopolists’ market power: at the corresponding subgame perfect equilibrium of the entire game, the uniform price is higher than that corresponding to the equilibrium of the BS in which the buyers are persistently randomizing.

Suggested Citation

  • Massimo A. Francesco, 2021. "Conditional loyalty and its implications for pricing," SN Business & Economics, Springer, vol. 1(10), pages 1-20, October.
    • Handle: RePEc:spr:snbeco:v:1:y:2021:i:10:d:10.1007_s43546-021-00142-w
    DOI: 10.1007/s43546-021-00142-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Bertrand–Edgeworth competition; Matching; Imperfect buyer mobility; Conditional loyalty; Assessment equilibrium;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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