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The Relationship between Pricing and Consumers Switching Costs: Comparisons between the Myopic and Perfect-foresight Equilibria

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  • Omar A. Abdelrahman

Abstract

In many markets, consumers face costs of switching to a competitor’s brand that is ex ante undifferentiated even when the two firms’ brands are functionally identical. This study examines the relationship between pricing and consumers witching costs or “brand loyalty”. Moreover, it suggests that in the presence of switching costs, firms will charge lower prices in the first period to gain market share that will be valuable to them in the future and therefore charge higher prices later utilizing the market shares they have gained in the first period. This will give firms a degree of monopoly power over their existing customers, leading to higher prices and profits in the future. This will happen if firms have perfect foresight, and it may lead to either higher or lower equilibrium profits than if firms behave myopically.

Suggested Citation

  • Omar A. Abdelrahman, 2017. "The Relationship between Pricing and Consumers Switching Costs: Comparisons between the Myopic and Perfect-foresight Equilibria," International Business Research, Canadian Center of Science and Education, vol. 10(3), pages 221-231, March.
    • Handle: RePEc:ibn:ibrjnl:v:10:y:2017:i:3:p:221-231
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    References listed on IDEAS

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    2. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    3. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    4. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 475-492, December.
    5. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    6. Victor Stango, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 475-492, December.
    7. To, Theodore, 1996. "Multi-period Competition with Switching Costs: An Overlapping Generations Formulation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 81-87, March.
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    More about this item

    Keywords

    switching costs; duopoly; myopic; perfect-foresight;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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