EXPLOITING AN ADVANTAGE--DECLINING AN ADVANTAGE

Within the context of the study, a firm is said to have an advantageover another if it obtains more customers given they both chargethe same price. Further, consumer switching costs imply thelarger the difference in the prices charged by the two firmsthe greater the proportion of consumers who switch from thehigher-priced firm to the lower-priced one. The Nash equilibriumto the price-posting game is characterized The firm with theadvantage charges a higher price Finally, it is shown that ifone firm can freely choose to have an advantage, it will rejectit. This follows as the greater the advantage, the smaller theequilibrium profits to both firms.