Lock in and Switch: Asymmetric Information and New Product Diffusion

16 Pages Posted: 13 Oct 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: April 2007

Abstract

Many new web-based services are introduced as free services. Depending on the sellerâ¬"s business model, some remain free in the long run, while others switch to pay mode at some point in time. I characterize the relation between buyers and a new service seller when the former are uncertain about the latterâ¬"sbusiness model. I derive a natural signalling equilibrium where the seller plays a â¬Slock-in-and-switchâ¬? strategy, while buyers play a â¬Swait-and-seeâ¬? strategy. I show the equilibrium entails diffusion even though consumers are identical and equally aware of the new serviceâ¬"s existence.

Suggested Citation

Cabral, Luis M. B., Lock in and Switch: Asymmetric Information and New Product Diffusion (April 2007). NYU Working Paper No. EC-07-11. Available at SSRN: https://ssrn.com/abstract=1281923

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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