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Market Share Dynamics in a Model with Search and Word-of-Mouth Communication

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  • Schmidt, Robert C.

Abstract

This paper analyzes price competition in an infinitely repeated duopoly game. In each period, consumers remember the existence and location of their previous supplier. New information is gathered via search or word-of-mouth communication. Market outcomes are history-dependent, and the Markov perfection refinement is used to narrow the set of equilibria. Firms are shown to use mixed pricing strategies in equilibrium. The resulting price dispersion generates non-trivial market share dynamics. The goal of the paper is to characterize these dynamics, and to reveal the driving forces behind them.

Suggested Citation

  • Schmidt, Robert C., 2010. "Market Share Dynamics in a Model with Search and Word-of-Mouth Communication," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 301, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:301
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    File URL: https://epub.ub.uni-muenchen.de/13253/1/301.pdf
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    More about this item

    Keywords

    repeat purchasing; search; customer loyalty; lock-in; mixed pricing;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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