Conditional loyalty and its implications for pricing

Bertrand-Edgeworth competition has recently been analyzed under imperfect buyer mobility, as a game in which, once prices are chosen, a static buyer subgame (BS) is played where the buyers choose which seller to visit (see, e.g., Burdett et al, 2001). Our paper considers a symmetric duopoly where two buyers play a two-stage BS of imperfect information after price setting. With prices su¢ ciently close, an equilibrium of the BS is characterized in which the buyers keep loyal if previously served. Conditional loyalty is proved to increase the Örmsímarket power: at the corresponding subgame perfect equilibrium of the entire game, the price is higher than that corresponding to the equilibrium of the BS in which the buyers are persistently randomizing.