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Dynamic Competition with Consumer Inertia

Author Info

Listed author(s):
  • Pot Erik
  • Flesch János
  • Peeters Ronald
  • Vermeulen Dries

    (METEOR)

Abstract

We study a framework where two duopolists compete repeatedly in prices and where cho-sen prices potentially affect future market shares, but certainly do not affect current sales.This assumption of consumer inertia causes (noncooperative) coordination on high pricesonly to be possible as an equilibrium for low values of the discount factor. In particular,high discount factors increase opportunism and aggressiveness of competition to such anextent that high prices are no longer sustainable as an equilibrium outcome (not even intrigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena withoutrequiring exogenous shocks in market or firm characteristics.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 037.

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Date of creation: 2009
Handle: RePEc:unm:umamet:2009037
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Keywords: microeconomics ;

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  1. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
  2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  3. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  4. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2008. "Noncooperative Collusion and Price Wars with Individual Demand Fluctuations," Research Memorandum 017, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Herings, P. Jean-Jacques & Peeters, Ronald J. A. P., 2004. "Stationary equilibria in stochastic games: structure, selection, and computation," Journal of Economic Theory, Elsevier, vol. 118(1), pages 32-60, September.
  6. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
  7. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, vol. 109(1), pages 24-38, March.
  8. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
  9. Radner, Roy, 2003. "Viscous demand," Journal of Economic Theory, Elsevier, vol. 112(2), pages 189-231, October.
  10. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 83-111.
  11. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
  12. Bos Iwan & Peeters Ronald & Pot Erik, 2010. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum 024, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  13. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
  14. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  15. Burdett, Kenneth & Coles, Melvyn G., 1997. "Steady State Price Distributions in a Noisy Search Equilibrium," Journal of Economic Theory, Elsevier, vol. 72(1), pages 1-32, January.
  16. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer.
  17. Radner, Roy & Richardson, Thomas J., 2003. "Monopolists and viscous demand," Games and Economic Behavior, Elsevier, vol. 45(2), pages 442-464, November.
  18. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
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Cited by:

  1. Anke Becker & Thomas Deckers & Thomas Dohmen & Armin Falk & Fabian Kosse, 2012. "The Relationship Between Economic Preferences and Psychological Personality Measures," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 453-478, 07.
  2. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2010. "Intentional Price Wars on the Equilibrium Path," Research Memorandum 028, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Bos Iwan & Peeters Ronald & Pot Erik, 2010. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum 024, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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