A Model of Market Power in Customer Markets

49 Pages Posted: 31 Dec 2013

See all articles by Paulo Somaini

Paulo Somaini

Stanford University - Department of Economics

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2013

Abstract

We develop a model for studying dynamic competition in environments with frictions that lead to partial lock‐in of customers to products. The dynamic aspects associated with customer retention and acquisition introduce pricing incentives that do not exist in more traditional, static product markets. The proposed model, while highly stylized, maintains certain symmetry properties that allow us to obtain equilibrium existence and uniqueness. We then study the comparative statics of the model and derive a closed‐form relationship between average equilibrium markups and the Herfindahl index. We illustrate how the model can be used by analyzing mergers in such a dynamic environment.

Suggested Citation

Somaini, Paulo and Einav, Liran, A Model of Market Power in Customer Markets (December 2013). The Journal of Industrial Economics, Vol. 61, Issue 4, pp. 938-986, 2013. Available at SSRN: https://ssrn.com/abstract=2373307 or http://dx.doi.org/10.1111/joie.12039

Paulo Somaini (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Liran Einav

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3704 (Phone)
928-223-4973 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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