Working Paper: CEPR ID: DP1905
Authors: Jan Bouckaert; Hans Degryse
Abstract: This paper characterizes price competition between an expert and a non-expert. In contrast with the expert, the non-expert?s repair technology is not always successful. Consumers visit the expert after experiencing an unsuccessful match at the non-expert. This re-entry affects the behaviour of both sellers. For low enough probability of successful repair at the non-expert, all consumers first visit the non-expert, and a ?timid-pricing? equilibrium results. If the non-expert?s repair technology performs well enough, it pays for some consumers to disregard the non-expert. They directly go to the expert?s shop, and an ?aggressive-pricing? equilibrium results. For intermediate values of the non-expert?s successful repair a ?mixed-pricing? equilibrium emerges where the expert randomizes over the monopoly price and some lower price.
Keywords: price competition; differentiation; reentry; quality
JEL Codes: L13; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonexpert's probability of successful repair (C59) | consumer decision to visit expert (D80) |
| consumer decision to visit expert (D80) | expert's pricing strategy (D49) |
| nonexpert's probability of successful repair (C59) | nonexpert's pricing strategy (D49) |
| nonexpert's probability of successful repair (C59) | consumer reentry to market (D16) |