Dynamic oligopoly pricing with reference-price effects

Luca Colombo, Paola Labrecciosa

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

We analyze the strategic implications of consumers’ reference-price effects, either symmetric (for loss-neutral consumers) or asymmetric (for loss-averse consumers), in a differentiated oligopoly model where firms compete either in prices (à la Bertrand) or in quantities (à la Cournot) over an infinite time horizon. The dynamic game is specified in continuous time. The solution concept is Markov Perfect Equilibrium. We show how price dynamics in the presence of reference-price effects crucially depends on the nature of market competition. One of the main results of our analysis is that, with loss-averse consumers, there exists an interval of initial reference prices such that firms adopt the same constant-pricing strategy in both the Bertrand and the Cournot games, implying that the distinction between price and quantity competition has no impact on market conduct and performance.

Original languageEnglish
Pages (from-to)1006-1016
Number of pages11
JournalEuropean Journal of Operational Research
Volume288
Issue number3
DOIs
Publication statusPublished - Feb 2021

Keywords

  • Dynamic pricing
  • Game theory
  • Loss aversion
  • Markov perfect equilibrium
  • Oligopoly

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