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Theoretical and Applied Economics
No. 10 / 2010 (551)

To Differentiate or Not to Differentiate: A Question when Some Consumers Are Loyal

Gongshangnansuo Jiashuyuan, Juancheng, Shandong Province, China 274600

Abstract. I analyze a duopoly that competes first in product characteristics and then in prices. I show that when there exist consumers that are loyal to specific brands with no regard for product characteristics, the second-stage price game doesn’t have a pure-strategy equilibrium or symmetric mixed-strategy equilibrium and the firms choose to maximize their product differentiation in the first stage, contrary to what is usually assumed in the price dispersion literature.

Keywords: pricing; product differentiation; price competition.

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