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Dynamic Competition with Consumer Inertia

  • Pot Erik
  • Flesch János
  • Peeters Ronald
  • Vermeulen Dries

    (METEOR)

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
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Handle: RePEc:unm:umamet:2009037
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  1. Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers.
  2. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  3. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  4. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
  5. Herings,P. Jean-Jacques & Peeters,Ronald J.A.P, 2000. "Stationary Equilibria in Stochastic Games: Structure, Selection, and Computation," Research Memorandum 004, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  6. Radner, Roy & Richardson, Thomas J., 2003. "Monopolists and viscous demand," Games and Economic Behavior, Elsevier, vol. 45(2), pages 442-464, November.
  7. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  8. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  9. 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.
  10. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  11. Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
  12. Robert H. Porter & J. Douglas Zona, 1997. "Ohio School Milk Markets: An Analysis of Bidding," NBER Working Papers 6037, National Bureau of Economic Research, Inc.
  13. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  14. Kenneth Burdett and Melvyn G. Coles, . "Steady State Price Distributions in a Noisy Search Equilibrium," Economics Discussion Papers 450, University of Essex, Department of Economics.
  15. Bos Iwan & Peeters Ronald & Pot Erik, 2012. "Competition versus Collusion: The Impact of Consumer Inertia," Research Memorandum 047, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  16. 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).
  17. Radner, Roy, 2003. "Viscous demand," Journal of Economic Theory, Elsevier, vol. 112(2), pages 189-231, October.
  18. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, vol. 109(1), pages 24-38, March.
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