Department of Computational Social Science Seminar-ZAWISZA & KAMINSKI

Friday, December 6, 3:00 p.m.
Center for Social Complexity Suite
Research Hall, Third Floor

Duopoly price competition with switching cost and bounded rational customers

Mateusz Zawisza and Bogumił Kaminski
Decision Support and Analysis Division,
Warsaw School of Economics,

Abstract: We consider the model of duopoly price competition with switching cost and clients' bounded price perception. Firms optimize their prices by maximizing profits in the long-- or short--term planning horizon. Customers demand exactly one unit of homogenous product. Customers incur a switching cost, if they decide to change their current supplier. Moreover, customers are featured by bounded price perception, which results in making random errors, while trying to find the cheapest product. The aim of research is to evaluate customers' switching cost with respect to equilibrium price, which is calculated by simulation methods. We show that the influence of switching cost is conditioned on customers' price perception and firms' planning horizon in an interactive, nonlinear and non--monotonic fashion. We find out that the impact of switching cost differs substantially between short-- and long--term planning horizon regime. Therefore, we identify the phase--transition driven by companies’ discount factor.