Smart Entry Strategies for Markets with Switching Costs
In this paper we consider a market with switching costs that is initially served by a monopolistic incumbent. How can a competitor successfully enter this market? We show that an offer to undercut the incumbent by a fixed margin serves this purpose. This strategy dominates traditional entry where the entrant just offers a lower price because it restrains the ability of the incumbent to block entry by limit pricing. We also consider adding a price ceiling to insure customers against future price increases. This strategy turns out to be the preferable one for entering markets with elastic demand.
KeywordsSwitching Cost Consumer Surplus Price Competition Elastic Demand Limit Price
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- 1.Florian W. Bartholomae, Karl Morasch, and Rita Orsolya Toth. Smart Entry in Local Retail Markets for Electricity and Natural Gas, volume 21–3 of Universität der Bundeswehr München Working Papers in Economics. 2009.Google Scholar