Enhancing Market Power by Reducing Switching Costs
AbstractCompeting firms often have the possibility to jointly determine the magnitude of consumers’ switching costs. Examples include compatibility decisions and the option of introducing number portability in telecom and banking. We put forward a model where firms jointly decide to reduce switching costs before competing in prices during two periods. We demonstrate that the outcome hinges crucially on how the joint action reduces consumers’ switching costs. In particular, firms will enhance their market power if they implementmeasures that reduce consumers’ switching costs by a lump sum. Conversely, they willpreserve market power by not implementing actions that reduce switching costsproportionally. Hence, when policy makers design consumer protection policies, they should not always adopt a favourable attitude towards efforts by firms to reduce switching costs.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2449.
Date of creation: 2008
Date of revision:
switching costs; market power; welfare;
Other versions of this item:
- Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, vol. 109(2), pages 131-133, November.
- Bouckaert J. & Degryse H. & Provoost Th., 2010. "Enhancing Market Power by Reducing Switching Costs," Working Papers 2010008, University of Antwerp, Faculty of Applied Economics.
- Bouckaert, J.M.C. & Degryse, H.A. & Provoost, T., 2008. "Enhancing Market Power by Reducing Switching Costs," Discussion Paper 2008-038, Tilburg University, Tilburg Law and Economic Center.
- Bouckaert, J.M.C. & Degryse, H.A. & Provoost, T., 2008. "Enhancing Market Power by Reducing Switching Costs," Discussion Paper 2008-91, Tilburg University, Center for Economic Research.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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