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Price Wars Caused by Switching Costs

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  • Klemperer, Paul

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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Bibliographic Info

Article provided by Wiley Blackwell 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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Cited by:
  1. Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
  2. Loreto Lira & Rosario Rivero & Rodrigo Vergara, 2007. "Entry and Prices: Evidence from the Supermarket Sector," Review of Industrial Organization, Springer, vol. 31(4), pages 237-260, December.
  3. Pot, Erik & Flesch, János & Peeters, Ronald & Vermeulen, Dries, 2013. "Dynamic competition with consumer inertia," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 355-366.
  4. Luis Cabral, 2014. "We're Number 1: Price Wars for Market Share Leadership," Working Papers 14-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Robin Mason & Timothy Swanson, . "Entry Deterrence and Environmental Regulation," Economics Papers 1997-W9, Economics Group, Nuffield College, University of Oxford.
  6. Nicoletta Corrocher & Lorenzo Zirulia, 2005. "Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry," KITeS Working Papers 166, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised May 2005.
  7. Hodaka Morita & Michael Waldman, 2010. "Competition, Monopoly Maintenance, and Consumer Switching Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 230-55, February.
  8. Nicoletta Corrocher & Lorenzo Zirulia, 2010. "Switching costs, consumer heterogeneity and price discrimination," Journal of Economics, Springer, vol. 101(2), pages 149-167, October.
  9. Elder, Erick & To, Ted, 1999. "Consumer switching costs and private information," Economics Letters, Elsevier, vol. 63(3), pages 369-375, June.
  10. repec:dgr:umamet:2009039 is not listed on IDEAS
  11. Elzinga, Kenneth G. & Mills, David E., 1999. "Price wars triggered by entry," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 179-198, February.
  12. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
  13. Zhang, Yahua & Round, David K., 2011. "Price wars and price collusion in China's airline markets," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 361-372, July.
  14. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
  15. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics, Springer, vol. 8(2), pages 167-205, June.
  16. A. Jorge Padilla, 1991. "Consumer switching costs: a survey," Investigaciones Economicas, Fundación SEPI, vol. 15(3), pages 485-504, September.
  17. Béthuel Makosso, 2005. "Analyse du processus concurrentiel dans les services des télécommunications au Congo : l'incidence des externalités de réseau et de la réglementation sur la dynamique du secteur de la téléphoni," Innovations, De Boeck Université, vol. 21(1), pages 217-242.
  18. Eric Anderson & Nanda Kumar, 2007. "Price competition with repeat, loyal buyers," Quantitative Marketing and Economics, Springer, vol. 5(4), pages 333-359, December.

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