A model of price-setting in regional duopolies based on consumer loyalty: theory and evidence from the Austrian newspaper industry

This paper extends a model by Deneckere et al. (J Ind Econ 40:147-156, 1992) to a multi-regional framework. It is assumed that some consumers are loyal to their respective regional firms, while others prefer the nationwide firm's product. A third type of consumers is sensitive to price. With simultaneous price-setting, it is profitable to undercut or to set the consumers' reservation price depending on the relative group sizes. With each type of leader-follower game, all firms set the reservation price. In this case, the most profitable scenario for the nationwide firm is to act as a price follower. The model is illustrated by the Austrian newspaper industry, represented by a nationwide firm that enjoys a national market share of over 50 per cent but nevertheless faces strong competition from regional producers in most regional markets. Actual price-setting behaviour is documented and interpreted for the observation period 1979-2003. It is shown that (i) the regional firms' prices were identical to the nationwide firm's most of the time, (ii) the nationwide firm almost always acted as a price follower, and (iii) a particular market entrant's aggressive undercutting was an inept strategy.