Dynamic Duopoly with Slowly Changing Customer Loyalties

Abstract A dynamic model of duopoly is considered in which a fixed fraction of the customer population changes loyalties in each period from the current high-price setter to the current low-price setter. The model is a stochastic game, and it is shown to have a Markov perfect equilibrium with distinctive economic features. Effects of changes in the duopolists' discount factors and in the stickiness of the customer loyalties on the equilibrium strategies and on long-run market structure are studied.

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