Endogenous Switching Costs in the Face of Poaching
- Endogenous Switching Costs in the Face of Poaching
- Rhee, Ki-Eun
- switching costs; behavior-based discrimination; dynamic pricing
- Issue Date
- Series/Report no.
- KDI Working Paper Series;07-24
- We study firms’ endogenous choice of switching costs in a model where firms adopt behavior-based price
discrimination by charging a low “poaching” price to the customers of competing firms. In a two-period
Hotelling model of product differentiation, we show that switching costs reduce the intensity of poaching
in terms of the portion of customers that switch but at the same time increase the intensity in terms of the
aggressiveness of the poaching activity. In addition to these second-period effects, switching costs make it
necessary for firms to fight for market shares in the first period. Overall, the benefits of locking-in
customers are exacerbated when firms poach in the second period and we show that firms find it optimal
to not create switching costs at all.
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