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Price Wars Caused by Switching Costs

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Author Info
Klemperer, Paul

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Abstract

In many markets, consumers have "switching costs" (for example, learning costs or transaction costs) of changing between functionally-equivalent brands of a product, or of using any brand for the first time. The author analyzes a four-period, complete-information model of a market with switching costs in which new entry occurs after the second period. The new entry results, in equilibrium, in a price war. That is, the new entrants' prices are higher in the postentry period than in the entry period, and the incumbent's price falls in either the preentry period or in the entry period and subsequently rises. The author interprets the incumbent's lowering its price in the preentry period as limit-pricing behavior. He distinguishes between two types of price war that can occur, and shows how the type, or mixture of types, that arises depends on the size of switching costs. Copyright 1989 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 56 (1989)
Issue (Month): 3 (July)
Pages: 405-20
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Handle: RePEc:bla:restud:v:56:y:1989:i:3:p:405-20

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  2. A. Jorge Padilla, 1991. "Consumer switching costs: a survey," Investigaciones Economicas, Fundación SEPI, vol. 15(3), pages 485-504, September. [Downloadable!]
  3. Erick Elder & Ted To, 1999. "Consumer Switching Costs and Private Information," Industrial Organization 9902001, EconWPA. [Downloadable!]
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  6. Nicoletta Corrocher & Lorenzo Zirulia, 2005. "Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry," CESPRI Working Papers 166, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised May 2005. [Downloadable!]
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  8. Morita, Hodaka & Waldman, Michael, 2006. "Competition, Monopoly Maintenance, and Consumer Switching Costs," MPRA Paper 1426, University Library of Munich, Germany. [Downloadable!]
  9. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA. [Downloadable!]
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