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Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition

Joseph Farrell^1,2; Nancy T. Gallini³

¹ Hoover Institution · ² University of California, Berkeley · ³ University of Toronto

We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.

DOI

10.2307/1886069

Volume

103 (4)

Pages

673

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