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The value of switching costs

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  • Biglaiser, Gary
  • Crémer, Jacques
  • Dobos, Gergely

Abstract

We study a dynamic model with an incumbent monopolist and entry in every subsequent period. We first show that if all consumers have the same switching cost, then the intertemporal profits of the incumbent are the same as if there was only one period. We then study the consequences of heterogeneity of switching costs. We prove that even low switching cost customers have value for the incumbent: when there are more of them its profits increase as their presence hinders entrants who find it more costly to attract high switching cost customers.

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File URL: http://idei.fr/doc/by/cremer_j/value_oct2012.pdf
File Function: Forthcoming in "Journal of Economic Theory"
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Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-142.

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Date of creation: 03 Feb 2010
Date of revision: 30 Oct 2012
Publication status: Published in Journal of Economic Theory, vol.�148, n°3, mai 2013, p.�935-952.
Handle: RePEc:tse:wpaper:22323

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  1. 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.
  2. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  4. Joseph Farrell & Paul Klemperer, 2006. "Co-ordination and Lock-in: Competition with Switching Costs and Network Effects," Economics Papers 2006-W07, Economics Group, Nuffield College, University of Oxford.
  5. Jean-Pierre Dube & Guenter J. Hitsch & Peter Rossi, 2006. "Do Switching Costs Make Markets Less Competitive?," 2006 Meeting Papers 514, Society for Economic Dynamics.
  6. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  7. Padilla A. Jorge, 1995. "Revisiting Dynamic Duopoly with Consumer Switching Costs," Journal of Economic Theory, Elsevier, vol. 67(2), pages 520-530, December.
  8. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
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Cited by:
  1. Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, vol. 109(2), pages 131-133, November.
  2. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Gary Biglaiser & Jacques Crémer & Gergely Dobos, 2014. "Heterogenous Switching Costs," CESifo Working Paper Series 4587, CESifo Group Munich.
  4. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," TSE Working Papers 13-451, Toulouse School of Economics (TSE).
  5. Jean-Pierre Ponssard, 2008. "Short term entry barriers may be good for long term competition," Working Papers hal-00347663, HAL.
  6. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," IDEI Working Papers 809, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. 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.
  8. Rhodes, Andrew, 2013. "Re-examining the Effects of Switching Costs," MPRA Paper 45982, University Library of Munich, Germany.

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