Template-Type: ReDIF-Paper 1.0
Author-Name: Renaud Foucart
Author-Name-First: Renaud
Author-Name-Last: Foucart
Author-Name: Jana Friedrichsen
Author-Name-First: Jana
Author-Name-Last: Friedrichsen
Title: All-pay competition with captive consumers
Abstract: We study a game in which two firms compete in quality to serve a market consisting of consumers with different initial consideration sets. If both firms invest below a certain quality threshold, they only compete for those consumers already aware of their existence. Above this threshold, a firm is visible to all and the highest quality attracts all consumers. In equilibrium, firms do not choose their investment deterministically but randomize over two disconnected intervals. On the one hand, the existence of initially captive consumers introduces an anti-competitive element: holding fixed the behavior of the rival firm, a firm with a larger captive segment enjoys a higher payoff from not investing at all. On the other hand, the fact that a firm’s initially captive consumers can still be attracted by very high quality introduces a pro-competitive element: high quality investments becomes more profitable for the underdog when the captive segment of the dominant firm increases. The share of initially captive consumers therefore has a non-monotonic effect on the investment levels of both firms.
Creation-Date: 2019
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2019_018.pdf
File-Format: application/pdf
Number: 277451127
Classification-JEL: D21, D44, M13
Keywords: quality competition, all-pay auction, endogenous prize, consideration sets
Handle: RePEc:lan:wpaper:277451127