Price competition and innovation in markets with brand loyalty

Robert Schmidt

Journal of Economics, 2013, vol. 109, issue 2, 147-173

Abstract: Intuition suggests that in markets with consumer lock-in (‘brand loyalty’), firms with a large customer base earn higher profits. We show for a homogeneous goods duopoly that the intuition can be misleading, as the intensity of price competition depends on the initial market split. We derive mixed-strategy equilibria, and show that competition is often most intense when the market is split evenly. As a result, firms coordinate on an asymmetric split when consumers are not yet attached to firms. We also allow for asymmetric costs, and analyze when firms with a larger customer base are more eager to innovate. Copyright Springer-Verlag 2013

Keywords: Switching cost; Market share; Customer base; Consumer lock-in; Mixed-strategy equilibrium; D43; L11; L21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:109:y:2013:i:2:p:147-173

DOI: 10.1007/s00712-012-0296-2

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