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Differentiation‐Induced Switching Costs and Poaching

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  • Thomas Gehrig
  • Rune Stenbacka

Abstract

We show that the presence of sufficiently significant switching costs, which are increasing in the degree of product differentiation, generates an equilibrium configuration with maximal differentiation within the framework of a Hotelling model with linear transportation costs. The equilibrium with maximal differentiation offers a formalization of the idea that competing firms have noncooperative incentives to establish maximal switching cost barriers. The equilibrium incentives for commitments to high switching costs can be explained with poaching profits, which are increasing in the switching costs. Ex ante competition for market shares in period 1 is unable to eliminate these poaching profits.

Suggested Citation

  • Thomas Gehrig & Rune Stenbacka, 2004. "Differentiation‐Induced Switching Costs and Poaching," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 635-655, December.
  • Handle: RePEc:bla:jemstr:v:13:y:2004:i:4:p:635-655
    DOI: 10.1111/j.1430-9134.2004.00026.x
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    File URL: https://doi.org/10.1111/j.1430-9134.2004.00026.x
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    Cited by:

    1. Rosa Branca Esteves, 2013. "Customer Poaching with Retention Strategies," NIPE Working Papers 02/2013, NIPE - Universidade do Minho.
    2. Wohlfarth, Michael, 2017. "Data Portability on the Internet: An Economic Analysis," 28th European Regional ITS Conference, Passau 2017 169506, International Telecommunications Society (ITS).
    3. Bernard Caillaud & Romain de Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    4. Gehrig, Thomas & Shy, Oz & Stenbacka, Rune, 2011. "History-based price discrimination and entry in markets with switching costs: A welfare analysis," European Economic Review, Elsevier, vol. 55(5), pages 732-739, June.
    5. Miettinen, Topi & Stenbacka, Rune, 2018. "Strategic short-termism: Implications for the management and acquisition of customer relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 200-222.
    6. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
    7. Zafer Ozdemir & Jack Barron & Subhajyoti Bandyopadhyay, 2011. "An Analysis of the Adoption of Digital Health Records Under Switching Costs," Information Systems Research, INFORMS, vol. 22(3), pages 491-503, September.
    8. Rhee, Ki-Eun, 2014. "What types of switching costs to create under behavior-based price discrimination?," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 209-221.
    9. Lam, Wing Man Wynne & Liu, Xingyi, 2020. "Does data portability facilitate entry?," International Journal of Industrial Organization, Elsevier, vol. 69(C).
    10. Renaud Foucart & Jana Friedrichsen, 2019. "All-pay competition with captive consumers," Working Papers 277451127, Lancaster University Management School, Economics Department.
    11. Bernard Caillaud & Romain De Nijs, 2014. "Strategic Loyalty Reward in Dynamic Price Discrimination," Marketing Science, INFORMS, vol. 33(5), pages 725-742, September.
    12. Yongmin Chen & Jason Pearcy, 2010. "Dynamic pricing: when to entice brand switching and when to reward consumer loyalty," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 674-685, December.
    13. Bernard Caillaud & Romain de Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," Working Papers halshs-00622291, HAL.
    14. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers 2007-19, Department of Economics and Business Economics, Aarhus University.
    15. Thomas Gehrig & Oz Shy & Rune Stenbacka, 2012. "A Welfare Evaluation of History-Based Price Discrimination," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 373-393, December.
    16. Luca Lambertini & Raimondello Orsini, 2013. "On Hotelling's ‘stability in competition’ with network externalities and switching costs," Papers in Regional Science, Wiley Blackwell, vol. 92(4), pages 873-883, November.
    17. Gehrig, Thomas & Stenbacka, Rune, 2007. "Information sharing and lending market competition with switching costs and poaching," European Economic Review, Elsevier, vol. 51(1), pages 77-99, January.
    18. Miettinen, Topi & Stenbacka, Rune, 2015. "Personalized pricing versus history-based pricing: implications for privacy policy," Information Economics and Policy, Elsevier, vol. 33(C), pages 56-68.
    19. Shy, Oz & Stenbacka, Rune, 2013. "Investment in customer recognition and information exchange," Information Economics and Policy, Elsevier, vol. 25(2), pages 92-106.
    20. Michael Wohlfarth, 2019. "Data Portability on the Internet," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 61(5), pages 551-574, October.
    21. Gehrig, Thomas & Stenbacka, Rune, 2005. "Two at the Top: Quality Differentiation in Markets with Switching Costs," CEPR Discussion Papers 4996, C.E.P.R. Discussion Papers.
    22. Oz Shy & Rune Stenbacka, 2011. "Customer recognition and competition," Working Papers 11-7, Federal Reserve Bank of Boston, revised 2011.
    23. Stenbacka, Rune & Takalo, Tuomas, 2019. "Switching costs and financial stability," Journal of Financial Stability, Elsevier, vol. 41(C), pages 14-24.
    24. Nikogosian, Vigen & Veith, Tobias, 2011. "Strategic pricing, market entry and competition: Evidence from German electricity submarkets," ZEW Discussion Papers 11-068, ZEW - Leibniz Centre for European Economic Research.
    25. repec:nip:nipewp:09/2014 is not listed on IDEAS

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