Market Frictions: A Unified Model of Search and Switching Costs

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Market Frictions: A Unified Model of Search and Switching Costs

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Wilson, Chris M

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Chris M. Wilson

Abstract

Despite the existence of two vast literatures, very little is known about the potential differences or interactions between search and switching costs. This paper demonstrates the benefits of examining the two frictions in unison. First, the paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour and market prices. In many cases, policymakers may prefer to reduce search costs rather than switching costs. Second, the paper illustrates a simple methodology for estimating the magnitude of both costs while demonstrating the potential bias that can arise from a single-cost approach.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13672.

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Date of creation: Feb 2009
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Handle: RePEc:pra:mprapa:13672

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Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-03-07 (All new papers)
NEP-CBE-2009-03-07 (Cognitive & Behavioural Economics)
NEP-LAB-2009-03-07 (Labour Economics)
NEP-MIC-2009-03-07 (Microeconomics)

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Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics. [Downloadable!]
Other versions:
- Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
- Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter. [Downloadable!] (restricted)
Moraga-González, José Luis & Wildenbeest, Matthijs R., 2008. "Maximum likelihood estimation of search costs," European Economic Review, Elsevier, vol. 52(5), pages 820-848, July. [Downloadable!] (restricted)
Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 515-39, October. [Downloadable!] (restricted)
Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics. [Downloadable!]
Other versions:
- Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233. [Downloadable!] (restricted)
Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 107-20, January. [Downloadable!] (restricted)
Christou, C. & Vettas, N., 2008. "On informative advertising and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 92-112, January. [Downloadable!] (restricted)
Padilla, A. Jorge, 1992. "Mixed pricing in oligopoly with consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 393-411, September. [Downloadable!] (restricted)
Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier. [Downloadable!] (restricted)
Other versions:
- 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. [Downloadable!]
- Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October. [Downloadable!] (restricted)
Giulietti, Monica & Otero, Jesus & Waterson, Michael, 2007. "Pricing behaviour under competition in the UK electricity supply industry," The Warwick Economics Research Paper Series (TWERPS) 790, University of Warwick, Department of Economics. [Downloadable!]
Yoonhee Tina Chang & Catherine Waddams Price, 2008. "Gain or Pain: Does Consumer Activity Reflect Utility Maximisation?," Working Papers 08-15, Centre for Competition Policy, University of East Anglia. [Downloadable!]
Waterson, Michael, 2003. "The role of consumers in competition and competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 129-150, February. [Downloadable!] (restricted)
Other versions:
- Waterson, Michael, 2001. "The role of consumers in competition and competition policy," The Warwick Economics Research Paper Series (TWERPS) 607, University of Warwick, Department of Economics. [Downloadable!]

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