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Dynamic Competition with Switching Costs

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  • Joseph Farrell
  • Carl Shapiro

Abstract

We analyze an overlapping-generations model of duopolistic competition in the presence of consumer switching costs. Competition for established buyers is continually intermingled with competition for new, uncommitted buyers. In equilibrium the firm with attached customers typically specializes in serving them and concedes new buyers to its rival. This pattern of repeated entry persists even when there are economies of scale or network externalities. Switching costs thus can cause inefficiency in a surprising way: far from forming an entry barrier, they encourage entry to serve new customers, even when such entry is inefficient.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 1 (Spring)
Pages: 123-137

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Handle: RePEc:rje:randje:v:19:y:1988:i:spring:p:123-137

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  1. Why learning economics is of no use, or how Flexstrom managed to fleece me
    by Alexia Gaudeul in Alexia Gaudeul's Blog on 2012-04-12 12:00:00
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