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 sufficiently close, an equilibrium of the BS is characterized in which the buyers keep loyal if previously served. Conditional loyalty is proved to increase the firms' market 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.