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Switching Costs, Firm Size, and Market Structure

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  • Simon Loertscher
  • Yves Schneider

Abstract

In many markets homogenous goods are sold both by large global firms ("chain stores") and small local firms. Surprisingly, chain stores often charge higher prices. Examples include hotels, airlines, and coffe shops. We provide a simple model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and change locations with a given probability. Consequently, chain stores insure consumers against switching costs. In equilibrium, chain stores charge higher prices, yet attract more consumers. Profits of local stores and chain stores increase with consumer mobility, but the latter do so faster.

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Bibliographic Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0515.

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Date of creation: Nov 2005
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Handle: RePEc:ube:dpvwib:dp0515

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Keywords: Firm size; switching costs; consumer mobility; market structure;

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Cited by:
  1. Andras Niedermayer, 2006. "Does a Platform Monopolist Want Competition?," Diskussionsschriften dp0604, Universitaet Bern, Departement Volkswirtschaft.

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