Price Promotions: Limiting Competitive Encroachment

Abstract

In this paper, we explore equilibrium pricing strategies in an infinite horizon repeated game for an oligopoly. We model the interactions between three firms in a market of switchers and loyals. Our analysis shows that if, there are sufficiently large number of switchers in the market, the demand parameter is within an acceptable range, and the firms have a sufficiently low discount rate, alternating promotions between national firms can be an outcome of a perfect Nash equilibrium between competing firms. This equilibrium results in an implicit collusion between national firms and therefore suggests that price promotions can be interpreted as a long run strategy pursued by national firms to defend their market shares from possible encroachments of a third firm. In this way we attempt to provide an explanation for the patterns of promotion observed in some industries and in particular the beverage industry.

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