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Fixed margin price undercutting: An adequate entry strategy in a market with switching costs?

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  • Florian W. Bartholomae
  • Karl Morasch
  • Rita Orsolya Seebode

Abstract

Purpose We try to determine the best strategy for entering a market with switching costs that is initially served by a monopolistic incumbent. Findings We show that an offer to undercut the incumbent by a fixed margin (FM) dominates traditional entry with a binding price offer (BO) as this conditional pricing strategy restrains the ability of the incumbent to block entry by limit pricing. Combining FM with a price ceiling (PC) insures customers against future price increases and turns out to be optimal for markets with elastic demand as long as cost uncertainty is not an issue. Conclusion Using a more elaborate entry strategy may facilitate entry in markets with switching costs. However, as these strategies may decrease welfare, they should be closely monitored by antitrust authorities.

Suggested Citation

  • Florian W. Bartholomae & Karl Morasch & Rita Orsolya Seebode, 2019. "Fixed margin price undercutting: An adequate entry strategy in a market with switching costs?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 40(7), pages 787-798, October.
    • Handle: RePEc:wly:mgtdec:v:40:y:2019:i:7:p:787-798
    DOI: 10.1002/mde.3043
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