Duopolistic competition in markets where consumers have switching costs

Research output: Working paper

Abstract

In a dynamic competition model where firms initially share half of the
market and consumers have switching costs, consumers’ sophistication, lifespan, and concentration impact the possibility to set collusive prices. I first show that with strategic long-run consumers, collusion is harder to
implement than when consumers are not strategic: with sophisticated
consumers, a deviating firm can cash-in the rents that a buyer obtains after switching. I then study the consequences of relaxing buyers concentration and show that collusion is then easier to maintain than with non-strategic consumers: with strategic consumers, a firm must offer a low price at the moment of deviation as consumers can benefit from increased competition, emerging from an asymmetric market structure,
without having to pay switching costs. The paper suggests simple policy recommendations: it does not suffice to educate consumers about the competitive effects of their current purchasing decisions, but central purchasing agencies also need to be promoted.
Original languageEnglish (US)
Place of PublicationUniversidad del Rosario
VolumeSerie Documnetos de Trabajo
StatePublished - Mar 2017

Fingerprint

Consumer markets
Switching costs
Collusion
Purchasing
Buyers
Competitive effect
Deviation
Market structure
Sophistication
Life span
Dynamic competition
Cash
Rent

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Cite this

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title = "Duopolistic competition in markets where consumers have switching costs",
abstract = "In a dynamic competition model where firms initially share half of themarket and consumers have switching costs, consumers’ sophistication, lifespan, and concentration impact the possibility to set collusive prices. I first show that with strategic long-run consumers, collusion is harder toimplement than when consumers are not strategic: with sophisticatedconsumers, a deviating firm can cash-in the rents that a buyer obtains after switching. I then study the consequences of relaxing buyers concentration and show that collusion is then easier to maintain than with non-strategic consumers: with strategic consumers, a firm must offer a low price at the moment of deviation as consumers can benefit from increased competition, emerging from an asymmetric market structure,without having to pay switching costs. The paper suggests simple policy recommendations: it does not suffice to educate consumers about the competitive effects of their current purchasing decisions, but central purchasing agencies also need to be promoted.",
author = "Guillem Roig",
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Duopolistic competition in markets where consumers have switching costs. / Roig , Guillem.

Universidad del Rosario, 2017.

Research output: Working paper

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