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Customer poaching with differentiated products and switching costs

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Abstract

We consider a dynamic two-period model where two firms offer products that are differentiated a la Hotelling. Consumers purchase products in a first period, and in a second period consumers are locked-in to their first-period choice of producer with a switching cost. In the second period firms are able to price discriminate based on consumers purcase history from period 1. We show that i) firms will approach their rival's customers by low prices in the second period (customer poaching) and that ineffcient switching will occur, ii) second-period prices are dependent on first-period market shares, a result in contrast to some of the received literature. Finally, iii) with high enough switching costs first-period prices is below the level in a static setting, and more so the higher the switching costs and the more differentiated the products are.

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  • Gabrielsen, Tommy Staahl, 2004. "Customer poaching with differentiated products and switching costs," Working Papers in Economics 09/04, University of Bergen, Department of Economics.
  • Handle: RePEc:hhs:bergec:2004_009
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    File URL: http://www.uib.no/filearchive/09-04.pdf
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    Cited by:

    1. Oz Shy & Rune Stenbacka, 2011. "Customer recognition and competition," Working Papers 11-7, Federal Reserve Bank of Boston.
    2. 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.
    3. Shy, Oz & Stenbacka, Rune, 2013. "Investment in customer recognition and information exchange," Information Economics and Policy, Elsevier, vol. 25(2), pages 92-106.

    More about this item

    Keywords

    Oligopoly and Other Imperfect Markets; Production; Pricing; and Market Structure; Size Distribution of Firms;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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