Lock in and Switch: Asymmetric Information and New Product Diffusion

Leonard N. Stern Economics Working Paper

16 Pages Posted: 17 May 2007

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2007

Abstract

Many new web-based services are introduced as free services. Depending on the seller'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 latter's business model. I derive a natural signalling equilibrium where the seller plays a "lock-in-and-switch" strategy, while buyers play a "wait-and-see" strategy. I show the equilibrium entails diffusion even though consumers are identical and equally aware of the new service's existence.

Suggested Citation

Cabral, Luis M. B., Lock in and Switch: Asymmetric Information and New Product Diffusion (April 1, 2007). Leonard N. Stern Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=986621 or http://dx.doi.org/10.2139/ssrn.986621

Luis M. B. Cabral (Contact Author)

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

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HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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