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The value of switching costs

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  • Biglaiser, Gary
  • Crémer, Jacques
  • Dobos, Gergely

Abstract

We study a dynamic model with an incumbent monopolist and entry in every subsequent period. We rst show that if all consumers have the same switching cost, then the intertemporal pro ts of the incumbent are the same as if there was only one period. We then study the consequences of heterogeneity of switching costs. We prove that even low switching cost customers have value for the incumbent: when there are more of them its pro ts increase as their presence hinders entrants who nd it more costly to attract high switching cost customers.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 596.

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Date of creation: 03 Feb 2010
Date of revision: 30 Oct 2012
Handle: RePEc:ide:wpaper:22317

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  1. Joseph Farrell & Paul Klemperer, 2006. "Co-ordination and Lock-in: Competition with Switching Costs and Network Effects," Economics Papers 2006-W07, Economics Group, Nuffield College, University of Oxford.
  2. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  3. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
  4. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  5. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  6. Jean-Pierre Dube & Guenter J. Hitsch & Peter Rossi, 2006. "Do Switching Costs Make Markets Less Competitive?," 2006 Meeting Papers, Society for Economic Dynamics 514, Society for Economic Dynamics.
  7. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 436, C.E.P.R. Discussion Papers.
  8. Padilla A. Jorge, 1995. "Revisiting Dynamic Duopoly with Consumer Switching Costs," Journal of Economic Theory, Elsevier, vol. 67(2), pages 520-530, December.
  9. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  10. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 375-94, May.
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Cited by:
  1. Bouckaert, J.M.C. & Degryse, H.A. & Provoost, T., 2008. "Enhancing Market Power by Reducing Switching Costs," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2008-038, Tilburg University, Tilburg Law and Economic Center.
  2. Jean-Pierre Ponssard, 2008. "Short term entry barriers may be good for long term competition," Working Papers hal-00347663, HAL.
  3. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 596, Institut d'Économie Industrielle (IDEI), Toulouse, revised 30 Oct 2012.
  4. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," TSE Working Papers, Toulouse School of Economics (TSE) 13-451, Toulouse School of Economics (TSE).
  5. Rhodes, Andrew, 2013. "Re-examining the Effects of Switching Costs," MPRA Paper 45982, University Library of Munich, Germany.
  6. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 809, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Gary Biglaiser & Jacques Crémer & Gergely Dobos, 2014. "Heterogenous Switching Costs," CESifo Working Paper Series 4587, CESifo Group Munich.

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