All-pay competition with captive consumers

Foucart, Renaud and Friedrichsen, Jana (2021) All-pay competition with captive consumers. International Journal of Industrial Organization, 75. ISSN 0167-7187

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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.

Item Type:
Journal Article
Journal or Publication Title:
International Journal of Industrial Organization
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This is the author’s version of a work that was accepted for publication in International Journal of Industrial Organization. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Journal of Industrial Organization, 75, 2021 DOI: 10.1016/j.ijindorg.2021.102709
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Deposited On:
07 Jan 2021 13:50
Last Modified:
29 Sep 2023 01:38