Alumni Changing the World

Eugen Kováč: “Market Share Dynamics in a Duopoly Model with Word-of-Mouth Communication”

Room 3, 2nd floor

Abstract:

This paper analyzes price competition in an infinitely repeated duopoly game with homogeneous goods. Information about suppliers spreads via word-of-mouth communication among consumers. A fraction of consumers remains locked-in at their previous supplier in each period. Market outcomes are, therefore, history-dependent. We derive Markov perfect equilibria in which firms use random pricing strategies. The endogenous price dispersion drives market share dynamics. We show that market shares tend to be more asymmetric when future profits are important. In an attempt to secure its dominant position in the market, it is often the firm with the larger customer base that prices aggressively.