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Paying Customers to Switch

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  • Yongmin Chen

Abstract

This paper studies the business practice of offering discounts to new customers in markets with switching costs. In a two‐period homogeneous‐good duopoly model, it is shown that the equilibrium amount of discounts increases continuously in the expected switching costs of a typical consumer. In equilibrium, firms offer the same prices and discounts in a mature market even if they have different market shares, and the demands faced by these firms in a new market become more elastic. Firms are worse off engaging in the discriminatory pricing, while consumers need not necessarily benefit from it. There is costly equilibrium switching of consumers, which creates a dead‐weight loss to the society.

Suggested Citation

  • Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    • Handle: RePEc:bla:jemstr:v:6:y:1997:i:4:p:877-897
    DOI: 10.1111/j.1430-9134.1997.00877.x
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    References listed on IDEAS

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    1. A. Jorge Padilla, 1992. "Mixed Pricing in Oligopoly with Consumer Switching Costs," Working Papers wp1992_9203, CEMFI.
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    6. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    7. Padilla, A. Jorge, 1992. "Mixed pricing in oligopoly with consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 393-411, September.
    8. Chen, Yongmin & Rosenthal, Robert W., 1996. "Dynamic duopoly with slowly changing customer loyalties," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 269-296, May.
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