Buyer's Strategies, Entry Barriers, and Competition

David T Scheffman and Pablo Spiller

Economic Inquiry, 1992, vol. 30, issue 3, 418-36

Abstract: In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments. Copyright 1992 by Oxford University Press.

Date: 1992
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