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Price patterns in an oligopoly with switching cost and uncertain demand

  • Mateusz Zawisza

    ()

  • Bogumil Kaminski

    ()

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.

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Article provided by Wroclaw University of Technology, Institute of Organization and Management in its journal Operations Research and Decisions.

Volume (Year): 3 (2013)
Issue (Month): ()
Pages: 71-89

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Handle: RePEc:wut:journl:v:3:y:2013:p:71-89:id:1089
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  1. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  2. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  4. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, March.
  5. repec:cup:cbooks:9780521772518 is not listed on IDEAS
  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. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  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.
  9. repec:cup:cbooks:9780521775908 is not listed on IDEAS
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