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Interfirm and Intrafirm Switching Costs in a Vertical Differentiation Setting: Green versus Nongreen Products
Author(s) -
Toolsema Linda A.
Publication year - 2009
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.1530-9134.2009.00214.x
Subject(s) - monopoly , homogeneous , product differentiation , industrial organization , microeconomics , business , consumption (sociology) , product (mathematics) , value (mathematics) , production (economics) , production cost , economics , computer science , mathematics , cournot competition , geometry , combinatorics , machine learning , sociology , mechanical engineering , engineering , social science
In a vertical differentiation model where both duopolists supply the same two qualities of an otherwise homogeneous product, we derive the critical level of the interfirm switching cost needed to sustain monopoly pricing. In particular, we show how a decrease in the intrafirm switching cost may cause a decrease in this critical value, thereby facilitating monopoly pricing. We apply the results to a setting with green and nongreen products—in particular electricity—and discuss implications for policy measures intended to stimulate the production and consumption of green products.