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Re-examining the Effects of Switching Costs

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  • Rhodes, Andrew

Abstract

Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45982.

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Date of creation: 08 Apr 2013
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Handle: RePEc:pra:mprapa:45982

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Keywords: Switching costs; Dynamic competition; Markov perfect equilibrium;

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References

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  1. Bouckaert, J.M.C. & Degryse, H.A. & Provoost, T., 2008. "Enhancing Market Power by Reducing Switching Costs," Discussion Paper, Tilburg University, Center for Economic Research 2008-91, Tilburg University, Center for Economic Research.
  2. Jean-Pierre Dubé & Günter J. Hitsch & Peter E. Rossi, 2010. "State dependence and alternative explanations for consumer inertia," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 41(3), pages 417-445.
  3. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," TSE Working Papers, Toulouse School of Economics (TSE) 10-142, Toulouse School of Economics (TSE), revised 30 Oct 2012.
  4. Monica Giulietti & Catherine Waddams Price & Michael Waterson, 2005. "Consumer Choice and Competition Policy: a Study of UK Energy Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(506), pages 949-968, October.
  5. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061414, December.
  6. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
  7. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics, Springer, Springer, vol. 8(2), pages 167-205, June.
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Cited by:
  1. Cabral, Luís M B, 2012. "Switching Costs and Equilibrium Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8970, C.E.P.R. Discussion Papers.

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