Games with switching costs and endogenous references
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Type :
Article
Publication Status :
Published
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Attribution 4.0 International
openAccess
https://creativecommons.org/licenses/by-nc/4.0/
openAccess
https://creativecommons.org/licenses/by-nc/4.0/
Abstract
We introduce a game-theoretic model with switching costs and endogenous references. An agent endogenizes his reference strategy, and then taking switching costs into account, he selects a strategy from which there is no profitable deviation. We axiomatically characterize this selection procedure in one-player games. We then extend this procedure to multiplayer simultaneous games by defining a Switching Cost Nash Equilibrium (SNE) notion, and prove that (i) an SNE always exists; (ii) there are sets of SNE, which can never be a set of Nash equilibrium for any standard game; and (iii) SNE with a specific cost structure exactly characterizes the Nash equilibrium of nearby games, in contrast to Radner's (1980) ε-equilibrium. Subsequently, we apply our SNE notion to a product differentiation model, and reach the opposite conclusion of Radner (1980): switching costs for firms may benefit consumers. Finally, we compare our model with others, especially Köszegi and Rabin's (2006) personal equilibrium.
Source :
Theoretical Economics
Date :
2022-05-25
Volume :
17
Issue :
2
Publisher :
Wiley
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