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Can Switching Costs Reduce Prices?

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  • Castilho, Rafael

Abstract

The existence of switching costs for consumers may aect prices.While rms have an incentive to increase prices and exploit its currentconsumers, they also might reduce prices to increase the number ofconsumers next period. This paper presents a model of consumer andpricing behavior with switching costs to investigate how prices vary withdierent switching costs levels. I also present a method to estimatemodel's parameters. Results show that prices do not monotonicallyincrease with switching costs. Market shares and prots increase forsmall switching cost values and decrease for larger ones.

Suggested Citation

  • Castilho, Rafael, 2018. "Can Switching Costs Reduce Prices?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 38(1), May.
    • Handle: RePEc:sbe:breart:v:38:y:2018:i:1:a:65890
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    References listed on IDEAS

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    1. Oleksandr Shcherbakov, 2016. "Measuring consumer switching costs in the television industry," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 366-393, May.
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    3. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
    4. 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.
    5. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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