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Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition

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  • Farrell, Joseph
  • Gallini, Nancy T.

Abstract

We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.
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(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Farrell, Joseph & Gallini, Nancy T., 1986. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt8zs1p5cc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:econwp:qt8zs1p5cc
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    References listed on IDEAS

    as
    1. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, pages 309-332.
    2. Girton, Lance & Henderson, Dale W., 1976. "Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model," Journal of Monetary Economics, Elsevier, pages 33-61.
    3. William H. Branson & Julio J. Rotemberg, 1981. "International adjustment with wage rigidity," NBER Chapters,in: International Seminar on Macroeconomics, pages 309-332 National Bureau of Economic Research, Inc.
    4. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44 National Bureau of Economic Research, Inc.
    5. Jeffrey Sachs, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, Oxford University Press, pages 731-747.
    6. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, pages 53-81.
    7. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, pages 97-125.
    8. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 1-76.
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