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Switching costs and screening efficiency of incomplete contracts

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Author Info
Mehmet Bac

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Abstract

We study the role of switching costs in a dynamic buyer-seller relationship where quality is not contractible and the sellers retain private information about their quality-relevant abilities. In this environment buyer switching costs increase the seller's bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first contract, in signalling his type. The overall effect is to enhance efficiency and increase the buyer's welfare. This beneficial effect stems from the link between quality, the buyer's posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost.

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File URL: http://economics.ca/cgi/xms?jab=v33n4/08.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 33 (2000)
Issue (Month): 4 (November)
Pages: 1034-1048
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Handle: RePEc:cje:issued:v:33:y:2000:i:4:p:1034-1048

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Find related papers by JEL classification:
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Xiaopeng Xu, 2002. "Quality over-provision of information goods," Economics Bulletin, Economics Bulletin, vol. 12, pages 1-9. [Downloadable!]
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This page was last updated on 2009-11-25.

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