Product Quality with Information Dissemination and Switching Costs

Eric Bennett Rasmusen, Kelley School of Business, Indiana University

Abstract

Klein and Leffler (1981) construct a model in which expected future prices exceed marginal costs so that sellers are willing to maintain high quality for the sake of future profits. How profits are dissapated under free entry, and whether there is a continuum of equilibria, are questions not fully resolved. I contstruct a formal model simpler than any now existing in which free entry and exogenous fixed costs uniquely determine the price of output and the amount sold per firm.