Re-examining the Effects of Switching Costs
AbstractConsumers 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 45982.
Date of creation: 08 Apr 2013
Date of revision:
Switching costs; Dynamic competition; Markov perfect equilibrium;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D4 - Microeconomics - - Market Structure and Pricing
- L0 - Industrial Organization - - General
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-COM-2013-04-13 (Industrial Competition)
- NEP-MIC-2013-04-13 (Microeconomics)
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