Dynamic Competition with Consumer Inertia

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Working paper
Erik Pot, János Flesch, Ronald Peeters and Dries Vermeulen
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Maastricht University
We study a framework where two duopolists compete repeatedly in prices and where cho- sen prices potentially a ect future market shares, but certainly do not a ect 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. In particular, high discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome (not even in trigger strategies). In addition, we nd that both monopolization and enduring market share and price uctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or rm characteristics.
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