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Market Frictions: A Unified Model of Search and Switching Costs

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  • Wilson, Chris M

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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File URL: http://mpra.ub.uni-muenchen.de/13672/
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File URL: http://mpra.ub.uni-muenchen.de/26652/
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Bibliographic Info

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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Keywords: Search costs; Switching Costs; Market Friction;

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References

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  1. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics.
  2. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
  3. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  4. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 107-20, January.
  5. 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.
  6. Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
  7. Nickolay V. Moshkin & Ron Shachar, 2002. "The Asymmetric Information Model of State Dependence," Marketing Science, INFORMS, vol. 21(4), pages 435-454, August.
  8. 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.
  9. Jean-Pierre Dube & Guenter J. Hitsch & Peter Rossi, 2006. "Do Switching Costs Make Markets Less Competitive?," 2006 Meeting Papers 514, Society for Economic Dynamics.
  10. Babur De los Santos, 2008. "Consumer Search on the Internet," Working Papers 08-15, NET Institute, revised Sep 2008.
  11. Monica Giulietti & Catherine Waddams Price & Michael Waterson, 2005. "Consumer Choice and Competition Policy: a Study of UK Energy Markets," Economic Journal, Royal Economic Society, vol. 115(506), pages 949-968, October.
  12. Jose Luis Moraga-Gonzalez & Matthijs R. Wildenbeest, 0000. "Maximum Likelihood Estimation of Search Costs," Tinbergen Institute Discussion Papers 06-019/1, Tinbergen Institute.
  13. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  14. Christou, C. & Vettas, N., 2008. "On informative advertising and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 92-112, January.
  15. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
  16. 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.
  17. 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, vol. 62(4), pages 515-39, October.
  18. 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.
  19. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
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Cited by:
  1. Wilson, Chris M. & Garrod, Luke & Munro, Alistair, 2013. "Default effects, transaction costs, and imperfect information," Economics Letters, Elsevier, vol. 119(2), pages 213-215.
  2. Yves Ortiz, 2011. "Prices and Choices in the Swiss Health Care Insurance Market," Working Papers 11.09, Swiss National Bank, Study Center Gerzensee.

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