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Do Switching Costs Make Markets Less Competitive?

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  • Jean-Pierre Dube
  • Guenter J. Hitsch

    ()
    (GSB University of Chicago)

  • Peter Rossi

Abstract

The conventional wisdom in economic theory holds that switching costs make markets less competitive. This paper challenges this claim. We find that steady-state equilibrium prices may fall as switching costs are introduced into a dynamic pricing model. To assess whether this finding is of empirical relevance, we consider a general model with differentiated products, imperfect lock-in and a large number of consumer types. We calibrate this model with data from a frequently purchased packaged goods market, where consumers exhibit brand loyalty, a specific form of switching costs. We are able to estimate the level of switching costs from the brand choice behavior in this data. At switching costs of the order of magnitude found in our data, prices are lower than in the situation without switching costs

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 514.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:514

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Related research

Keywords: Switching Costs; Dynamic Oligopoly; Bayesian Econometrics;

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Cited by:
  1. Maarten C.W. Janssen & Mariëlle C. Non, 2005. "Advertising and Consumer Search in a Duopoly Model," Tinbergen Institute Discussion Papers 05-022/1, Tinbergen Institute.
  2. Jason Allen & Robert Clark & Jean-François Houde, 2008. "Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry," Working Papers 08-32, Bank of Canada.
  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. Lukasz Grzybowski & Pedro Pereira, 2007. "Merger Simulation in Mobile Telephony in Portugal," Working Papers 07-12, NET Institute, revised Sep 2007.
  5. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany.
  6. Wesley Hartmann & V. Viard, 2008. "Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program," Quantitative Marketing and Economics, Springer, vol. 6(2), pages 109-137, June.
  7. Ribeiro, Ricardo, 2010. "Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies," MPRA Paper 25812, University Library of Munich, Germany.

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