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Customer Poaching in Vertical Differentiation

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  • Chong-Kook Park

    (Kyung Hee University)

Abstract

We analyze the effects of poaching in vertical differentiation to compare with that in horizontal differentiation as in Fudenberg and Tirole (1999). We find second period prices are lower than the static equilibrium prices as in FT. However, the poacher's price of the high quality product in the second-period is strictly higher than the price of the low quality firm unlike FT. We show that the firm of the low quality product sets the price in the first-period above the static level. The same result as this in FT is only applied to the low quality product in vertical differentiation. We also illustrate that the firm of the high quality product may set the second period price above, or below, or equal to the price in a static case. The possibility that the poaching price in the first-period may be lower than the static price is similar to the standard switching-cost models. This paper is in the vein that the horizontal differentiation model is a special case of the vertical differentiation one. (Gremer and Thisse, 1991)

Suggested Citation

  • Chong-Kook Park, 2001. "Customer Poaching in Vertical Differentiation," Korean Economic Review, Korean Economic Association, vol. 17, pages 361-375.
    • Handle: RePEc:kea:keappr:ker-200112-17-2-10
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    More about this item

    Keywords

    Customer Poaching; Vertical Differntiations; Switching Cost;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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