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. in J Political Econ 109:1060–1085, 2001). Our paper considers a symmetric duopoly where two buyers play a two-stage BS of imperfect information after price setting. An “assessment equilibrium” of the BS is shown to exist in which, with prices at the two frms sufciently close to each other, the buyers keep loyal if previously served. Conditional loyalty is proved to increase the duopolists’ market power: at the corresponding subgame perfect equilibrium of the entire game, the uniform price is higher than that corresponding to the equilibrium of the BS in which the buyers are persistently randomizing.