Dynamic Competition with Consumer Inertia

Posted by D. Daniel Sokol

Erik Pot, János Flesch, Ronald Peeters, and Dries Vermeulen (all Maastricht University - Econ) describe Dynamic Competition with Consumer Inertia.

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 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 anextent that high prices are no longer sustainable as an equilibrium outcome (not even in trigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.