Endogenous switching costs and the incentive for high quality entry

Arbeitspapier

This paper analyzes how the strategic use of switching costs by an incumbent influences entry, price competition and the entrant’s incentive to introduce a high quality product, in a market with vertically differentiated goods. We can prove the existence of a unique subgame perfect equilibrium whose characteristics depends on the costs of developing quality. If these costs are low, the entrant strongly differentiates its product and price competition is tougher than without switching costs. If the costs of product’s quality are in the middle range, the entrant differentiates its product less and each firm specializes on a group of customers. This implies a less competitive industry since both suppliers have market power over their purchasers. If the costs of differentiation are high enough, entry is deterred through the strategic use of switching costs. Furthermore we can show that the entrant always underinvests in quality when compared to the case of no switching costs. The equilibrium outcome is inefficient, since total welfare decreases in the presence of switching costs. Policy suggestions are discussed.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WZB Discussion Paper ; No. FS IV 99-29

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Duso, Tomaso
• Event: Veröffentlichung
• (who): Wissenschaftszentrum Berlin für Sozialforschung (WZB)
• (where): Berlin
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/51050
• Last update: 10.03.2025, 11:44 AM CET