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Competition When Consumers Have Switching Costs: An Overview

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Klemperer, Paul

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Abstract

This paper surveys recent work on competition in markets in which consumers face costs to switching between competing firms' products, even when all firms' products are functionally identical. I address issues in macroeconomics, international trade and industrial organization: In a market with switching costs (or `brand loyalty'), a firm's current market share is an important determinant of its future profitability. I examine how the firm's choice between setting a low price to capture market share, and setting a high price to harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry, interest rates, exchange rate expectations, the state of the business cycle, etc. I also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 704.

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Date of creation: Jul 1992
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Handle: RePEc:cpr:ceprdp:704

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Related research
Keywords: Brand Loyalty; Lock-In; Switching Costs;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F31 - International Economics - - International Finance - - - Foreign Exchange
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

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