Basic Switching Cost Regressions Sample Clauses

Basic Switching Cost Regressions. Firms responded to our question in one of three ways. About a sixth of them said they would reject the new supplier outright. Another half said they would switch entirely to the new supplier. The remaining third said they would buy from both suppliers, presumably reducing quantities purchased from the existing supplier but not abandoning it. In the regressions, we look at the decision to reject the lower-priced offer vs. the decision to accept it (whether or not the buyer continues to deal with the incumbent supplier). That is we sum the responses of those who say they would buy entirely from the new supplier and those who say they would buy some from the new supplier and some from the incumbent. It is the decision to accept or reject the new offer that is most relevant from the point of view of assessing barriers to entry, for this is what determines whether a new entrant can make any sales.29 29 Buying from both the new supplier and the incumbent may reflect additional considerations not in our analysis: it may be an effort to reduce risk rather than to accept risk. For example, in more than 90% of the cases in Russia and Ukraine for which we have complete information, entrepreneurs indicate that they would buy from both suppliers. These two countries have the least developed and thinnest markets among our countries, suggesting perhaps that these entrepreneurs are responding to the opportunity to diversify existing risk by adding a new supplier. The independent variables described above are shown on Table 5. As with trade credit, we exclude import and state-owned suppliers from the sample. Our main findings can be shown with simple tests for differences of means. The sample can be divided into relationship involving inputs of two types. The first, which we term standard, are produced to inventory and sold by the supplier to multiple manufacturers. Inputs are standard in 76% of the supplier relationships in the sample. The remaining 24% of the sample are custom inputs. These are produced to order, produced uniquely for our manufacturer, or both. Switching suppliers in the latter relationships involves higher risk on the part of the manufacturer. Consistent with switching cost theory, manufacturers say they would reject the lower-price offer in 13% of the relationships involving standard goods, but 25% of the relationships involving custom goods. (The difference is significant, t=4.67.) How does a belief in the effectiveness of courts affect the level of s...