Price competition in markets with customer testing: The captive customer effect

Research output: Contribution to journalArticleResearchpeer review

Authors

  • Heidrun C. Hoppe
  • Ulrich Lehmann-Grube

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Details

Original languageEnglish
Pages (from-to)497-521
Number of pages25
JournalEconomic theory
Volume35
Issue number3
Publication statusPublished - Jun 2008

Abstract

We introduce product differentiation into the analysis of price competition in markets where suppliers test customers in order to assess whether they will pay for received goods or services. We find that, if the degree of differentiation is sufficiently high, suppliers may improve the average probability that their clientele will pay by charging higher prices. This helps suppliers to sustain high prices in equilibrium. Moreover, endogenizing locations in product space, we demonstrate that the high price level can be implemented in a pure-strategy subgame-perfect equilibrium with a high degree of differentiation. This is in contrast to the original Hotelling model with linear travel costs where a pure-strategy subgame-perfect equilibrium fails to exist.

Keywords

    Hotelling, Iterated elimination of strictly dominated strategies, Mixed strategies, Price competition, Testing

ASJC Scopus subject areas

Cite this

Price competition in markets with customer testing: The captive customer effect. / Hoppe, Heidrun C.; Lehmann-Grube, Ulrich.
In: Economic theory, Vol. 35, No. 3, 06.2008, p. 497-521.

Research output: Contribution to journalArticleResearchpeer review

Hoppe HC, Lehmann-Grube U. Price competition in markets with customer testing: The captive customer effect. Economic theory. 2008 Jun;35(3):497-521. doi: 10.1007/s00199-007-0250-7
Hoppe, Heidrun C. ; Lehmann-Grube, Ulrich. / Price competition in markets with customer testing : The captive customer effect. In: Economic theory. 2008 ; Vol. 35, No. 3. pp. 497-521.
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