All-Pay Competition with Captive Consumers

Renaud Foucart and Jana Friedrichsen

No 268, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study a game in which two firms compete in quality to serve a market consisting of consumers with different initial consideration sets. If both firms invest below a certain threshold, they only compete for those consumers already aware of their existence. Above this threshold, a firm is visible to all and the highest investment attracts all consumers. On the one hand, the existence of initially captive consumers introduces an anti-competitive element: holding fixed the behavior of its rival, a firm with a larger captive segment enjoys a higher payoff from not investing at all. On the other hand, the fact that a firm’s initially captive consumers can still be attracted by very high quality introduces a pro-competitive element: a high investment becomes more profitable for the underdog when the captive segment of the dominant firm increases. The share of initially captive consumers therefore has a non-monotonic effect on the investment levels of both firms and on consumer surplus. We relate our findings to competition cases in digital markets.

Keywords: consideration set; regulation; all-pay auction; endogenous prize; digital markets (search for similar items in EconPapers)
JEL-codes: D04 (search for similar items in EconPapers)
Date: 2021-01-12
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-reg
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Related works:
Journal Article: All-pay competition with captive consumers (2021)
Journal Article: All-pay competition with captive consumers (2021)
Working Paper: All-pay competition with captive consumers (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:268

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