Price Competition in Markets with Consumer Variety Seeking

We show that the non-cooperative equilibrium in a two-period duopoly with consumer variety-seeking may be the same as the collusive outcome in an otherwise identical market without variety-seeking. Specifically, our variety-seeking model implies tacit collusion between firms in both periods, and not just in the second period only as in the switching-cost model of Klemperer (1987a, 1987b), which applies to markets with consumer inertia. Interestingly, when consumers are assumed to have rational expectations about future prices, the collusion result in the first period becomes even stronger.