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Price patterns in an oligopoly with switching cost and uncertain demand

Author

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  • Mateusz Zawisza

    ()

  • Bogumil Kaminski

    ()

Abstract

We investigate the characteristics of price patterns in an oligopoly market with costs for switching a provider. We consider two regimes of a company’s access to information. In the benchmark scenario, firms make decisions based on perfect information about demand. In the second – more realistic scenario – they conduct market research to estimate an unknown demand curve and therefore face uncertainty regarding their profit function, which in turn leads to sub-optimal decision making. We inspect how (1) a company’s access to information on demand, (2) costs for switching a provider and (3) the rate of market renewal, influence price patterns on the market. We show that a positive switching cost is a sufficient condition for price dispersion, as well as imperfect information about the company's profit function, e.g. from market research. We conclude that (1) the average price under the perfect information regime is lower than under market research based price setting, (2) a higher switching cost makes it easier for companies to coordinate their prices and (3) a higher rate of market renewal softens the influence of the switching cost on market price.

Suggested Citation

  • Mateusz Zawisza & Bogumil Kaminski, 2013. "Price patterns in an oligopoly with switching cost and uncertain demand," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 71-89.
  • Handle: RePEc:wut:journl:v:3:y:2013:p:71-89:id:1089
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    References listed on IDEAS

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    4. Vega-Redondo,Fernando, 2003. "Economics and the Theory of Games," Cambridge Books, Cambridge University Press, number 9780521775908.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    6. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    7. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    8. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
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