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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