Details
| Original language | English |
|---|---|
| Pages (from-to) | 497-521 |
| Number of pages | 25 |
| Journal | Economic theory |
| Volume | 35 |
| Issue number | 3 |
| Publication status | Published - 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
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Economic theory, Vol. 35, No. 3, 06.2008, p. 497-521.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Price competition in markets with customer testing
T2 - The captive customer effect
AU - Hoppe, Heidrun C.
AU - Lehmann-Grube, Ulrich
PY - 2008/6
Y1 - 2008/6
N2 - 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.
AB - 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.
KW - Hotelling
KW - Iterated elimination of strictly dominated strategies
KW - Mixed strategies
KW - Price competition
KW - Testing
UR - http://www.scopus.com/inward/record.url?scp=40849100250&partnerID=8YFLogxK
U2 - 10.1007/s00199-007-0250-7
DO - 10.1007/s00199-007-0250-7
M3 - Article
AN - SCOPUS:40849100250
VL - 35
SP - 497
EP - 521
JO - Economic theory
JF - Economic theory
SN - 0938-2259
IS - 3
ER -