Quantity discounts, loyalty and price competition in segmented duopolistic markets

Abstract

In the first part of the Dissertation, we focus on analyzing whether a incumbent can use quantity discounts to deter a more efficient but capacity constrained rival from entering the market. Although entry can profitably be deterred, the incumbent's optimal strategy is to accommodate entry. In a dynamic framework, when the incumbent faces sequential entry by short-lived entrants, we find that entry deterrence is an equilibrium of the infinitely repeated game if the discount factor is large enough. In the second part of the Dissertation, we have analyzed price competition in duopolistic segmented markets when each firm has a loyal customer base. Loyal customers buy only from the firm to which they are loyal. The unique equilibrium of the price-setting game is in mixed strategies. The equilibrium probability distributions have a common support but they are different. The firm with the larger customer base, in equilibrium, chooses a probability distribution that has an atom of positive probability at the reservation price. The distribution of the firm with the larger customer base stochastically dominates that of the firm with the smaller costumer base, indicating that, on average, we should expect higher prices charged by the firm with the higher costumer base. When we endogenize the segmentation of the market by adding a prior stage in which the firms select the media through which they provide information, we find that the subgame perfect equilibria in pure strategies are asymmetric. We have applied the model to study price competition between rival cafes, taking as given their smoking policies, when consumers are divided between smokers, radical non-smokers and non-radical non-smokers. Radical non-smokers only patronize smoke-free cafes while smokers avoid them. The non-radical non-smokers compare prices regardless of the smoking policies. We find that smoke-free cafes charge higher (lower) expected prices when the population of radical non-smokers is larger (smaller) than the population of smokers. When smoking policies are endogenous, depending on the parameters of the model, we find that selecting the same policy can be an equilibrium of the game.