QME

, Volume 8, Issue 2, pp 167–205

Switching costs, experience goods and dynamic price competition

Article

Abstract

I analyze a dynamic duopoly with an infinite horizon where consumers are uncertain about their potential satisfaction from the products and face switching costs. I derive sufficient conditions for the existence of a Markov Perfect Equilibrium(MPE) where switching takes place each period. I show that when switching costs are sufficiently low, the prices in the steady state are lower than what they would have been when they are absent. This result is in contrast to those found in the literature. In the presence of low switching costs competition can be fiercer.

Keywords

Dynamic price competition Experience goods Markov-perfect equilibrium Switching costs 

JEL Classification

C73 D21 D43 L13 L14 L15 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of Business and EconomicsUniversity of Southern DenmarkOdenseDenmark
  2. 2.Faculty of Arts and SciencesSabanci UniversityIstanbulTurkey

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