This paper examines the use of switching costs by long lived strategic buyers to manage dynamic competition between rival suppliers. The analysis reveals how buyers may employ switching costs to their advantage. We show, ironically, when switching costs are high a buyer may induce suppliers to price more competitively by credibly threatening to replace the incumbent supplier with his rivals. The implication of these findings for adoption of technology and firm organization are explored in setting where buyers are integrated with their suppliers and where the buyer is an outsourcer.
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Paper provided by Duke University, Department of Economics in its series Working Papers with number
03-04.
Length: Date of creation: 2003 Date of revision: Handle: RePEc:duk:dukeec:03-04
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Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games D44 - Microeconomics - - Market Structure and Pricing - - - Auctions L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
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