Faculty of Economics and Business Administration Publications Database

Why Competition May Drive up Prices

Volume: 47
Number: 4
Pages: 451 - 462
Month: April
ISSN-Print: 0167-2681
Link External Source: Online Version
Year: 2002
Keywords: Switching costs; Imperfect competition
Abstract: We show that the expected price of an incumbent firm may increase in response to increasing competition as it may become more profitable to exploit a rather immobile fraction of consumers instead of capturing a larger but more contested segment of the market. To derive this result, we consider two approaches of modelling the degree of competition. First, in a duopolistic setting competition is said to be more intense if the entrant’s product becomes more attractive to the mobile fraction of buyers. In this case we find that all buyers, i.e. both the mobile and the immobile fraction, may lose if the market becomes more competitive. Secondly, in a model with two entrants competition is said to become intense if entrants serve an overlapping segment of the market for mobile buyers.