IDEAS home Printed from https://ideas.repec.org/a/qua/journl/v7y2010i1p67-93.html
   My bibliography  Save this article

Price competition in mixed strategies in markets with habit formation

Author

Listed:
  • Alejandro Tatsuo Moreno Okuno

    (Universidad de Guanajuato)

Abstract

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.

Suggested Citation

  • Alejandro Tatsuo Moreno Okuno, 2010. "Price competition in mixed strategies in markets with habit formation," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 7(1), pages 67-93, Julio - D.
  • Handle: RePEc:qua:journl:v:7:y:2010:i:1:p:67-93
    as

    Download full text from publisher

    File URL: http://econoquantum.cucea.udg.mx/index.php/EQ/article/view/120
    Download Restriction: no

    File URL: http://econoquantum.cucea.udg.mx/index.php/EQ/issue/view/18
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Osborne, Martin J & Pitchik, Carolyn, 1987. "Equilibrium in Hotelling's Model of Spatial Competition," Econometrica, Econometric Society, vol. 55(4), pages 911-922, July.
    2. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias in Predicting Future Utility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1209-1248.
    3. Alejandro Tatsuo Moreno-Okuno, 2012. "Habit formation and oligopolistic competition," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 27(2), pages 379-400.
    4. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-763, Part I Ju.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alejandro Tatsuo Moreno-Okuno, 2012. "Habit formation and oligopolistic competition," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 27(2), pages 379-400.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alejandro Tatsuo Moreno Okuno, 2010. "Price competition in mixed strategies in markets with habit formationPrice competition in mixed strategies in markets with habit formation," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 7(1), pages 69-95, Julio - D.
    2. repec:spo:wpmain:info:hdl:2441/vbu6kd1s68o6r34k5bcm3iopv is not listed on IDEAS
    3. Ciccarelli, Carlo & Giamboni, Luigi & Waldmann, Robert, 2007. "Cigarette smoking, pregnancy, forward looking behavior and dynamic inconsistency," MPRA Paper 8878, University Library of Munich, Germany.
    4. van den Bijgaart, I.M., 2017. "Too slow a change? Deep habits, consumption shifts and transitory tax," Working Papers in Economics 701, University of Gothenburg, Department of Economics.
    5. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    6. Inge van den Bijgaart, 2018. "Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy," CESifo Working Paper Series 6958, CESifo.
    7. Di Tella, Rafael & Haisken-De New, John & MacCulloch, Robert, 2010. "Happiness adaptation to income and to status in an individual panel," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 834-852, December.
    8. Luc Wathieu, 2004. "Consumer Habituation," Management Science, INFORMS, vol. 50(5), pages 587-596, May.
    9. Emmerling, Johannes & Qari, Salmai, 2017. "Car ownership and hedonic adaptation," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 29-38.
    10. Manel Baucells & Rakesh K. Sarin, 2010. "Predicting Utility Under Satiation and Habit Formation," Management Science, INFORMS, vol. 56(2), pages 286-301, February.
    11. Clément Bellet, 2017. "Essays on inequality, social preferences and consumer behavior [Inégalités, préférences sociales et comportement du consommateur]," SciencePo Working papers Main tel-03455045, HAL.
    12. O'Donoghue, Ted & Rabin, Matthew, 2000. "Risky Behavior Among Youths: Some Issues from Behavioral Economics," Department of Economics, Working Paper Series qt5sf0z5rs, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    13. Clément Bellet, 2017. "Essays on inequality, social preferences and consumer behavior [Inégalités, préférences sociales et comportement du consommateur]," SciencePo Working papers tel-03455045, HAL.
    14. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.
    15. Ted O'Donoghue & Matthew Rabin, 2001. "Risky Behavior among Youths: Some Issues from Behavioral Economics," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 29-68, National Bureau of Economic Research, Inc.
    16. Do,Quy-Toan & Jacoby,Hanan G., 2020. "Sophisticated Policy with Naive Agents : Habit Formation and Piped Water in Vietnam," Policy Research Working Paper Series 9207, The World Bank.
    17. O'Donoghue, Ted & Rabin, Matthew, 2002. "Addiction and Present-Biased Preferences," Working Papers 02-10, Cornell University, Center for Analytic Economics.
    18. Rafael Di Tella & Robert MacCulloch, 2008. "Happiness Adaptation to Income beyond "Basic Needs"," NBER Working Papers 14539, National Bureau of Economic Research, Inc.
    19. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 485-512, June.
    20. Chai, Junyi, 2021. "A model of ambition, aspiration and happiness," European Journal of Operational Research, Elsevier, vol. 288(2), pages 692-702.
    21. repec:hal:spmain:info:hdl:2441/vbu6kd1s68o6r34k5bcm3iopv is not listed on IDEAS
    22. Alessio Emanuele Biondo & Roberto Cellini & Tiziana Cuccia, 2020. "Choices on museum attendance: An agent‐based approach," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 882-897, November.

    More about this item

    Keywords

    habit-formation; oligopolistic competition; product differentiation; Hotelling's location model.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qua:journl:v:7:y:2010:i:1:p:67-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sandra Ivett Portugal Padilla (email available below). General contact details of provider: https://edirc.repec.org/data/dmudgmx.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.