Competitive Price Equilibrium with Consumer Reservation Utility

Masaaki Kijima (), Kei-Ichiro Nakagawa () and Takashi Namatame ()
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Masaaki Kijima: Tokyo Metropolitan University
Kei-Ichiro Nakagawa: NTT Data Corporation
Takashi Namatame: Science University of Tokyo

Computational and Mathematical Organization Theory, 2000, vol. 6, issue 1, No 2, 7-27

Abstract: Abstract This paper studies a competitive price equilibrium in the market of a product category where consumers are homogeneous with a reservation utility below which they will not purchase the product. The impact of the reservation utility on the price equilibrium is of particular interest, because the reservation utility may change according to the business cycle and economic environments. Using multinomial logit model to describe market response, we study the comparative statics of the prices, profits and market shares of firms, each of which produces one brand in the product category, with respect to the reservation utility in the Nash equilibrium. It is shown that, as the reservation utility increases, the prices as well as the profits at Nash equilibrium decrease. Also, in the case of duopoly market, the firm with lower cost structure will increase its market share as the reservation utility increases.

Keywords: pricing research; competitive strategy; game theory (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1023/A:1009669024901

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