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Discussion Paper Details

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Title: Two at the Top: Quality Differentiation in Markets with Switching Costs

Author(s): Thomas Gehrig and Rune Stenbacka

Publication Date: April 2005

Keyword(s): natural oligopoly, poaching, quality choice and switching costs

Programme Area(s): Industrial Organization

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%.

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Bibliographic Reference

Gehrig, T and Stenbacka, R. 2005. 'Two at the Top: Quality Differentiation in Markets with Switching Costs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4996