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Announcement, Entry, and Preemption When Consumers Have Switching Costs

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  • Heiko A. Gerlach

    () (University of Auckland)

Abstract

I study the incentives of innovating firms to announce their entry in markets in which consumers incur a cost of switching from one product to another. Announcing entry can prevent the lock-in of potential demand before the launch of the new product. At the same time, however, the incumbent firm learns about the impending entry and has the opportunity to cut prices and preempt the market. In equilibrium, entrants do not always announce, and I show that this behavior maximizes ex ante total welfare. By contrast, consumers might be better off with a ban on announcements. When the entrant's claims are not verifiable, vaporware announcements arise in equilibrium, and I demonstrate that they can be beneficial for consumers.

Suggested Citation

  • Heiko A. Gerlach, 2004. "Announcement, Entry, and Preemption When Consumers Have Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 184-202, Spring.
  • Handle: RePEc:rje:randje:v:35:y:2004:1:p:184-202
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    References listed on IDEAS

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    7. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, pages 38-56.
    8. Gans, Joshua S. & King, Stephen P., 2001. "Using 'bill and keep' interconnect arrangements to soften network competition," Economics Letters, Elsevier, vol. 71(3), pages 413-420, June.
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    Cited by:

    1. Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated?," Documents de Travail de l'OFCE 2008-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    2. Jong-Hee Hahn & Jin-Hyuk Kim, 2012. "Monopoly R&D and Compatibility Decisions in Network Industries," Working papers 2012rwp-43, Yonsei University, Yonsei Economics Research Institute.
    3. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h56210pa6 is not listed on IDEAS
    4. Evens Salies, 2012. "Product Innovation when Consumers have Switching Costs," Chapters,in: Handbook on the Economics and Theory of the Firm, chapter 31 Edward Elgar Publishing.
    5. Jay Pil Choi & Eirik Gaard Kristiansen & Jae Nahm, 2005. "Strategic Product Pre-announcements in Markets with Network Effects," Working Papers 05-09, NET Institute, revised Sep 2005.
    6. Evens Salies, 2011. "Product innovation when consumers have switching costs," Working Papers hal-01069477, HAL.
    7. Kerstan, Sven & Kretschmer, Tobias & Muehlfeld, Katrin, 2012. "The dynamics of pre-market standardization," Information Economics and Policy, Elsevier, vol. 24(2), pages 105-119.

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