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All-Pay Competition with Captive Consumers

Author

Listed:
  • Foucart, Renaud

    (Lancaster University)

  • Friedrichsen, Jana

    (HU Berlin)

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 threshold, they only compete for those consumers already aware of their existence. Above this threshold, a firm is visible to all and the highest investment attracts all consumers. On the one hand, the existence of initially captive consumers introduces an anti-competitive element: holding fixed the behavior of its rival, 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: a high investment 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 and on consumer surplus. We relate our findings to competition cases in digital markets.

Suggested Citation

  • Foucart, Renaud & Friedrichsen, Jana, 2021. "All-Pay Competition with Captive Consumers," Rationality and Competition Discussion Paper Series 268, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:268
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    References listed on IDEAS

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    More about this item

    Keywords

    consideration set; regulation; all-pay auction; endogenous prize; digital markets;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation

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