DP846 Revisiting Dynamic Duopoly with Consumer Switching Costs

Author(s): Atilano Jorge Padilla
Publication Date: October 1993
Keyword(s): Dynamic Programming, Entry Deterrence, Markov Perfect Equilibrium, Optimal Punishments, Switching Costs, Tacit Collusion
JEL(s): C73, D43, L13
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=846

The degree of collusiveness of a market with consumer switching costs is studied in an infinite-horizon overlapping-generations model of duopolistic competition. In contrast to previous models of switching costs, this paper assumes that firms compete for the demand for a homogeneous good by setting prices simultaneously in each period. It characterizes the unique symmetric stationary Markovian perfect equilibrium of this game and shows that the existence of switching costs unambiguously relaxes price competition in equilibrium. It also shows that, on the contrary, tacit collusion is more difficult to sustain in a market with consumer switching costs since the severity of the optimal punishments is reduced.