Brand Loyalty in a Bertrand-Type Oligopoly Setting

Abstract

It appears that in today’s brand-proliferating, constantly market-segmenting and technologically evolving global economy, consumer perceptions affect an entire industry in which brand loyalty is possible such as the extremely hot and rapidly developing global smartphone industry. In a brand-loyalty-prone industry, what are the implications of brand loyalty in terms of, among others, industry price, sales and profit? I propose a market structure in which each firm’s profit depends on sales of a brand realized in a captive market segment as well as on sales of the same brand realized in a non-captive market segment; ignoring costs of production and assuming that all firms simultaneously enter into the two market segments and that price discrimination of the 3rd degree is not possible, I employ a Bertrand-type duopoly structure and then aggregate over n firms. Counterintuitively, industry price, quantity and profit all rise with entry. The findings are primarily due to the assumed entry condition (that each entrant enters into two market segments one of which is a monopoly) and secondarily to the inability of the sellers to price discriminate. I conclude that experience-type data in the smartphone industry can be considered as somewhat supportive of the proposed structure and the derived theoretical results.