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Switching Costs and Equilibrium Prices

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  • Cabral, Luis

Abstract

In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.

Suggested Citation

  • Cabral, Luis, 2012. "Switching Costs and Equilibrium Prices," CEPR Discussion Papers 8970, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8970
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    References listed on IDEAS

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    10. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
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    Cited by:

    1. Natalia Fabra & Alfredo García, 2015. "Dynamic Price Competition with Switching Costs," Dynamic Games and Applications, Springer, vol. 5(4), pages 540-567, December.
    2. Fabra, Natalia & García, Alfredo, 2015. "Market structure and the competitive effects of switching costs," Economics Letters, Elsevier, vol. 126(C), pages 150-155.
    3. David Byrne & Brian K. Kovak & Ryan Michaels, 2013. "Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services," NBER Working Papers 19637, National Bureau of Economic Research, Inc.
    4. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany.

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    More about this item

    Keywords

    Price competition; Switching costs;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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