Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition
AbstractThe authors show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. The authors show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Bibliographic InfoPaper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt8zs1p5cc.
Date of creation: 01 Dec 1986
Date of revision:
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second-sourcing; lock-in; commitment; licensing; dynamic consistency; Business; Social and Behavioral Sciences;
Other versions of this item:
- Farrell, Joseph & Gallini, Nancy T, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 673-94, November.
- Joseph Farrell and Nancy T. Gallini., 1986. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," Economics Working Papers 8618, University of California at Berkeley.
- Joseph Farrell and Nancy T. Gallini., 1987. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," Economics Working Papers 8760, University of California at Berkeley.
- Farrell, Joseph & Gallini, Nancy T., 1987. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt4zr9b9dr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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