All-Pay Competition with Captive Consumers

Aufsätze referiert extern - Web of Science

Renaud Foucart, Jana Friedrichsen

In: International Journal of Industrial Organization 75 (2021), 102709, 19 S.


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.

Jana Friedrichsen

Research Associate in the Firms and Markets Department

JEL-Classification: D4;L1;L4
Keywords: Consideration set, Regulation, All-pay auction, Endogenous prize, Digital markets