Exploiting an Advantage--Declining an Advantage.

Within the context of the study, a firm is said to have an advantage over another if it obtains more customers given they both charge the same price. Further, consumer switching costs imply the larger the difference in the prices charged by the two firms the greater the proportion of consumers who switch from the higher-priced firm to the lower-priced one. The Nash equilibrium to the price-posting game is characterized. 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 will reject it. This follows as the greater the advantage, the smaller the equilibrium profits to both firms. Copyright 1997 by Royal Economic Society.