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Profitable cannibalization

Author

Listed:
  • Schulz, Norbert

Abstract

Using a model with switching costs it is shown that firms may have an incentive to set up a new firm supplying to the same market under quite general conditions. The new firm attracts some market share of the founding firm. The start up firm is thus an act of cannibalization. Moreover, entry of the new firm may increase average prices. This is due to the fact that the new firm has more difficulties to overcome switching costs than incumbent firms. Competition may therefore be less intense.

Suggested Citation

  • Schulz, Norbert, 2001. "Profitable cannibalization," W.E.P. - Würzburg Economic Papers 27, University of Würzburg, Department of Economics.
  • Handle: RePEc:zbw:wuewep:27
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    More about this item

    Keywords

    oligopoly; switching costs; price-increasing entry;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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