Do Switching Costs Make Markets Less Competitive?
AbstractThe 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
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 514.
Date of creation: 03 Dec 2006
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Switching Costs; Dynamic Oligopoly; Bayesian Econometrics;
Find related papers by JEL classification:
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- 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.
- Janssen, Maarten C.W. & Non, Marielle C., 2008. "Advertising and consumer search in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 354-371, January.
- 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.
- Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013.
"The value of switching costs,"
Journal of Economic Theory,
Elsevier, vol. 148(3), pages 935-952.
- Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," IDEI Working Papers 596, Institut d'Économie Industrielle (IDEI), Toulouse, revised 30 Oct 2012.
- Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," TSE Working Papers 10-142, Toulouse School of Economics (TSE), revised 30 Oct 2012.
- Lukasz Grzybowski & Pedro Pereira, 2007.
"Merger Simulation in Mobile Telephony in Portugal,"
07-12, NET Institute, revised Sep 2007.
- Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany.
- 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.
- Ribeiro, Ricardo, 2010. "Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies," MPRA Paper 25812, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.