Two at the Top: Quality Differentiation in Markets with Switching Costs

Thomas Gehrig and ,

No 4996, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We explore the effects of switching costs on the subgame perfect quality decisions of oligopolists with repeated price competition. We establish a strong strategic quality premium. We show that competition for the establishment of customer relationships will eliminate low-quality firms in period 1 and that low-quality firms can survive only based on poaching profits. The equilibrium configuration is characterized by an agglomeration of two providers of top-quality as soon as switching cost heterogeneity is sufficiently significant. We demonstrate a finiteness property, according to which the two top-quality firms dominate the market with a joint market share exceeding 50%.

Keywords: Quality choice; Switching costs; Poaching; Natural oligopoly (search for similar items in EconPapers)
JEL-codes: D43 L15 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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