Print version ISSN 1870-6622
MORENO OKUNO, Alejandro Tatsuo. Price competition in mixed strategies in markets with habit formation. EconoQuantum [online]. 2010, vol.7, n.1, pp. 69-95. ISSN 1870-6622.
I analyze competition when individuals' favorite characteristics are the characteristics of the products they have consumed in the past. I model a two-period game in which two firms compete with each other in a market of differentiated products where individuals' favorite characteristics in the second period are the characteristics of the products they consumed in the first period. In this context, firms can manipulate the distribution of preferences. If firms differentiate their products, they will separate preferences, creating the equivalent of a switching cost between products. However, if firms produce similar products, they will reduce the cost of every individual to consume the product of the other firm, increasing competition. I solve for the Subgame Perfect Nash Equilibrium of the model and I find that firms choose to differentiate their products the most possible by placing their products at the extremes of the characteristic space.
Keywords : habit-formation; oligopolistic competition; product differentiation; Hotelling's location model.