Jeux sans frontières Revisited : A New Study of Tax Competition when Transportation Cost is Composite

Switching costs can prevent products that would be socially beneficial from being produced. We construct a model in which the switching cost takes the form of an investment required to manufacture a new form of an existing product. Given the cost, it is privately rational for producers not to invest. We analyze whether tax policy can change the incentives sufficiently to ensure the product is introduced and determine the welfare implications of policy. The general message of the paper is that tax policy can be employed to prevent switching costs from trapping an economy in a socially-inefficient position.