Working Paper: CEPR ID: DP4996
Authors: Thomas Gehrig; Rune Stenbacka
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: Natural Oligopoly; Poaching; Quality Choice; Switching Costs
JEL Codes: D43; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switching costs (D23) | quality decisions of oligopolists (D43) |
| switching costs (D23) | market structure (D49) |
| switching costs (D23) | survival of firms in the market (L10) |
| switching costs (D23) | market concentration (L11) |
| switching costs (D23) | competitive advantage of high-quality firms (L15) |
| competitive advantage of high-quality firms (L15) | poaching profits (K42) |
| poaching profits (K42) | market structure with two dominant firms (L10) |