Interfirm and Intrafirm Switching Costs in a Vertical Differentiation Setting: Green versus Nongreen Products
Linda A. Toolsema
In a vertical differentiation model where both duopolists supply the same two qualities of an otherwise homogeneous product, we derive the critical level of the interfirm switching cost needed to sustain monopoly pricing. In particular, we show how a decrease in the intrafirm switching cost may cause a decrease in this critical value, thereby facilitating monopoly pricing. We apply the results to a setting with green and nongreen products—in particular electricity—and discuss implications for policy measures intended to stimulate the production and consumption of green products.