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Consumer switching costs and private information

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  • Elder, Erick
  • To, Ted

Abstract

We consider a standard model of consumer switching costs with demand uncertainty where firms observe private information about demand. Given this private information, each firm forms beliefs over different demand realizations as well as beliefs over the other firm's information. The main result here is that in the first period, if firms observe information suggesting that future demand is likely to be high, they will price aggressively, sacrificing current profits for higher market share and the expectation of higher future profits.
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  • Elder, Erick & To, Ted, 1999. "Consumer switching costs and private information," Economics Letters, Elsevier, vol. 63(3), pages 369-375, June.
  • Handle: RePEc:eee:ecolet:v:63:y:1999:i:3:p:369-375
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    References listed on IDEAS

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    1. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
    2. Hartigan, James C, 1996. "Perverse Consequences of the GATT: Export Subsidies and Switching Costs," Economica, London School of Economics and Political Science, vol. 63(249), pages 153-161, February.
    3. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    4. von Weizsacker, C Christian, 1984. "The Costs of Substitution," Econometrica, Econometric Society, vol. 52(5), pages 1085-1116, September.
    5. Theodore To, 1999. "Dynamics and Discriminatory Import Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 1057-1068, August.
    6. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    7. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    8. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-725, September.
    9. Greaney, Theresa M., 2000. "Righting past wrongs: can import promotion policies counter hysteresis from past trade protection in the presence of switching costs?," Japan and the World Economy, Elsevier, vol. 12(3), pages 211-227, September.
    10. To, Theodore, 1996. "Multi-period Competition with Switching Costs: An Overlapping Generations Formulation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 81-87, March.
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    1. repec:eee:joreco:v:28:y:2016:i:c:p:296-303 is not listed on IDEAS

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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