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Switching costs and screening efficiency of incomplete contracts

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  • Mehmet Bac

Abstract

We study the role of switching costs in a dynamic buyer-seller relationship where quality is not contractible and the sellers retain private information about their quality-relevant abilities. In this environment buyer switching costs increase the seller's bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first contract, in signalling his type. The overall effect is to enhance efficiency and increase the buyer's welfare. This beneficial effect stems from the link between quality, the buyer's posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost.

Suggested Citation

  • Mehmet Bac, 2000. "Switching costs and screening efficiency of incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1034-1048, November.
  • Handle: RePEc:cje:issued:v:33:y:2000:i:4:p:1034-1048
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    Cited by:

    1. Xiaopeng Xu, 2002. "Quality over-provision of information goods," Economics Bulletin, AccessEcon, vol. 12(5), pages 1-9.
    2. repec:ebl:ecbull:v:12:y:2002:i:5:p:1-9 is not listed on IDEAS
    3. repec:pal:jorsoc:v:60:y:2009:i:3:d:10.1057_palgrave.jors.2602560 is not listed on IDEAS

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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