Issue: 2013/Vol.23/No.3, Pages 71-89
PRICE PATTERNS IN AN OLIGOPOLY WITH SWITCHING COST AND UNCERTAIN DEMAND
Mateusz Zawisza
, Bogumił Kamiński
Cite as: M. Zawisza, B. Kamiński. Price patterns in an oligopoly with switching cost and uncertain demand. Operations Research and Decisions 2013: 23(3), 71-89. DOI 10.5277/ord130306
Abstract
Characteristics of price patterns have been investigated in an oligopoly market with costs for switching a provider. Two regimes of a company’s access to information have been considered. In the benchmark scenario, firms make decisions based on perfect information about demand. In the other – more realistic scenario – they conduct market research to estimate an unknown demand curve and therefore face uncertainty regarding their profit function, which in turn leads to suboptimal decision making. The authors inspected how a company’s access to information on demand, costs for switching a provider and the rate of market renewal influence price patterns on the market. It has been shown that positive switching cost is a sufficient condition for price dispersion, as well as imperfect information about the company's profit function, e.g. from market research. The average price under the perfect information regime is lower than under market research based price setting, a higher switching cost makes it easier for companies to coordinate their prices and a higher rate of market renewal softens the influence of the switching cost on market price.
Keywords: price competition, switching cost, agent-based modeling, uncertain demand, price volatility
Received: Accepted: