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Strategic Invasion in Markets with Switching Costs
Author(s) -
Wang Ruqu,
Wen Quan
Publication year - 1998
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1998.00521.x
Subject(s) - subgame perfect equilibrium , marginal cost , harm , microeconomics , industrial organization , business , set (abstract data type) , economics , game theory , computer science , programming language , political science , law
We investigate the role of consumer switching costs in a three‐stage model in which the entrant and the incumbent firm set prices sequentially and then the consumers decide from which firm to buy. We characterize the unique subgame perfect equilibrium and find that even an entrant with a higher marginal cost may profitably invade part of the market due to the existence of switching costs. Switching costs benefit both firms but harm consumers. This model is used to understand pricing behavior in the US telecommunications industry.