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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. Copyright Blackwell Publishing 2004.

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  • 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
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    Citations

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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. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    3. 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.
    4. 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.
    5. 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.
    6. Shy, Oz & Stenbacka, Rune, 2013. "Investment in customer recognition and information exchange," Information Economics and Policy, Elsevier, vol. 25(2), pages 92-106.
    7. 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.
    8. Oz Shy & Rune Stenbacka, 2011. "Customer recognition and competition," Working Papers 11-7, Federal Reserve Bank of Boston.
    9. Nikogosian, Vigen & Veith, Tobias, 2011. "Strategic pricing, market entry and competition: Evidence from German electricity submarkets," ZEW Discussion Papers 11-068, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. repec:nip:nipewp:09/2014 is not listed on IDEAS
    11. Wohlfarth, Michael, 2017. "Data Portability on the Internet: An Economic Analysis," 28th European Regional ITS Conference, Passau 2017 169506, International Telecommunications Society (ITS).
    12. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
    13. 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.
    14. 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.
    15. 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.

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