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Revisiting Dynamic Duopoly with Consumer Switching Costs

Author

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  • Padilla, Atilano Jorge

Abstract

The degree of collusiveness of a market with consumer switching costs is studied in an infinite-horizon overlapping-generations model of duopolistic competition. In contrast to previous models of switching costs, this paper assumes that firms compete for the demand for a homogeneous good by setting prices simultaneously in each period. It characterizes the unique symmetric stationary Markovian perfect equilibrium of this game and shows that the existence of switching costs unambiguously relaxes price competition in equilibrium. It also shows that, on the contrary, tacit collusion is more difficult to sustain in a market with consumer switching costs since the severity of the optimal punishments is reduced.

Suggested Citation

  • Padilla, Atilano Jorge, 1993. "Revisiting Dynamic Duopoly with Consumer Switching Costs," CEPR Discussion Papers 846, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:846
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    More about this item

    Keywords

    Dynamic Programming; Entry Deterrence; Markov Perfect Equilibrium; Optimal Punishments; Switching Costs; Tacit Collusion;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • 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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