EXPLOITING AN ADVANTAGE - DECLINING AN ADVANTAGE

Within the context of the study, a firm is said to have an advantage o ver another if it obtains more customers given they both charge the sa me price. Further, consumer switching costs imply the larger the diffe rence in the prices charged by the two firms the greater the proportio n of consumers who switch from the higher-priced firm to the lower-pri ced one. The Nash equilibrium to the price-posting game is characteriz ed. The firm with the advantage charges a higher price. Finally, it is shown that if one firm can freely choose to have an advantage, it wil l reject it. This follows as the greater the advantage, the smaller th e equilibrium profits to both firms.