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Switching costs and screening efficiency of incomplete contracts

Author

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  • Mehmet Bac

Abstract

We study the role of switching costs in a dynamic buyer‐seller relationship where quality is not contractible and the sellers retain private information about their quality‐relevant abilities. In this environment buyer switching costs increase the seller's bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first ontract, in signalling his type. The overall effect is to enhance efficiency and ncrease the buyer's welfare. This beneficial effect stems from the link between quality, the buyer's posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost. JEL Classification: L14 L'auteur étudie le rôle des coûts de commutation dans une relation dynamique acheteur‐vendeur où la qualité de la prestation ne peut être partie du contrat, et où les vendeurs peuvent rationner l'information quant à leurs compétences à livrer un produit de qualité. Dans ce contexte, les coûts de commutation de l'acheteur accroissent le pouvoir de marchandage du vendeur dans la négociation du second contrat, mais ils peuvent aussi inciter le vendeur à améliorer la qualité au cours du premier contrat pour signaler ses compétences à l'acheteur. L'effet global est d'améliorer l'efficacité et d'accroître le bien‐être de l'acheteur. Cet effet bénéfique émerge du lien entre la qualité, les croyances de l'acheteur a posteriori, et la répartition du pouvoir de négociation ex post en tant que fonction des coûts de commutation.

Suggested Citation

  • Mehmet Bac, 2000. "Switching costs and screening efficiency of incomplete contracts," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 33(4), pages 1034-1048, November.
    • Handle: RePEc:wly:canjec:v:33:y:2000:i:4:p:1034-1048
    DOI: 10.1111/0008-4085.00052
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    Cited by:

    1. Cuihong Li & Laurens G. Debo, 2009. "Strategic dynamic sourcing from competing suppliers with transferable capacity investment," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(6), pages 540-562, September.
    2. repec:ebl:ecbull:v:12:y:2002:i:5:p:1-9 is not listed on IDEAS
    3. Rajagopal & A Rajagopal, 2009. "Buyer–supplier relationship and operational dynamics," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(3), pages 313-320, March.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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