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Dynamic competition with consumer inertia

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Abstract

We study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.
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Details

Original languageEnglish
Pages (from-to)355-366
Number of pages11
JournalJournal of Mathematical Economics
Volume49
Issue number5
DOIs
Publication statusPublished - 1 Jan 2013