Price Competition between an Expert and a Non-Expert

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 behavior 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.

JEL Classification: D43, L13, L15