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Dynamic Price Competition with Persistent Consumer Tastes

  • Toker Doganoglu

    (University of Kiel)

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    The dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium(MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there is no persistence in consumer tastes. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.

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    File URL: http://fmwww.bc.edu/RePEc/es2000/1442.pdf
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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1442.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1442
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    1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    2. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
    3. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
    4. Maskin, Eric & Tirole, Jean, 1987. "A theory of dynamic oligopoly, III : Cournot competition," European Economic Review, Elsevier, vol. 31(4), pages 947-968, June.
    5. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    6. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
    7. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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