Price competition and innovation in markets with brand loyalty

• Published in: Journal of economics (Vienna, Austria) Vol. 109; no. 2; pp. 147 - 173
• Main Author: Schmidt, Robert C.
• Format: Journal Article
• Language: English
• Published: Vienna Springer-Verlag 01.06.2013; Springer Vienna; Springer Nature B.V
• Subjects: Brand loyalty; Brands; Competition; Consumer economics; Consumer equilibrium; Consumer prices; Consumers; Cost control; Cost reduction; Customer bases; Customers; Economic models; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Equilibrium; Equilibrium prices; Game Theory; Incentives; Innovation; Innovations; Macroeconomics/Monetary Economics//Financial Economics; Marginal costs; Market competition; Market prices; Market share; Market shares; Microeconomics; Monopoly; Price competition; Prices; Profit; Public Finance; Social and Behav. Sciences; Studies; Switching cost; D43; Market share; Mixed-strategy equilibrium; Customer base; L21; Consumer lock-in; L11
• ISSN: 0931-8658; 1617-7134
• DOI: 10.1007/s00712-012-0296-2

Intuition suggests that in markets with consumer lock-in ('brand loyalty'), firms with a large customer base earn higher profits. We show for a homogeneous goods duopoly that the intuition can be misleading, as the intensity of price competition depends on the initial market split. We derive mixed-strategy equilibria, and show that competition is often most intense when the market is split evenly. As a result, firms coordinate on an asymmetric split when consumers are not yet attached to firms. We also allow for asymmetric costs, and analyze when firms with a larger customer base are more eager to innovate.