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When do switching costs make markets more or less competitive?

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  • Ruiz-Aliseda, Francisco

Abstract

In a two-period duopoly setting in which switching costs are the only reason why products may be perceived as differentiated, we provide necessary and sufficient conditions for switching costs to lead to higher prices in the first period as well as to higher overall profitability. We show that this happens if and only if switching costs are not too large. We present the only treatment up to date of how switching costs (and only switching costs) affect competition based on the assumption that switching costs differ across consumers, which allows us to illustrate the undesired byproduct of assuming that products exhibit substantial horizontal differentiation. Not only do we draw implications for the classical literature on competition with switching costs, but also for the more recent one that rests upon such an assumption too.

Suggested Citation

  • Ruiz-Aliseda, Francisco, 2016. "When do switching costs make markets more or less competitive?," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 121-151.
    • Handle: RePEc:eee:indorg:v:47:y:2016:i:c:p:121-151
    DOI: 10.1016/j.ijindorg.2016.04.002
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    References listed on IDEAS

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    9. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    10. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
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    Cited by:

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    2. Feng Zhu & Xinxin Li & Ehsan Valavi & Marco Iansiti, 2021. "Network Interconnectivity and Entry into Platform Markets," Information Systems Research, INFORMS, vol. 32(3), pages 1009-1024, September.
    3. Lam, W., 2015. "Switching Costs in Two-sided Markets," LIDAM Discussion Papers CORE 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Aljoscha Janssen, 2022. "Price dynamics of Swedish pharmaceuticals," Quantitative Marketing and Economics (QME), Springer, vol. 20(4), pages 313-351, December.
    5. Zhou, Yongyi & Zhang, Yulin & Goh, Mark, 2023. "Platform responses to entry in a local market with mobile providers," European Journal of Operational Research, Elsevier, vol. 309(1), pages 236-251.
    6. Janssen, Aljoscha, 2020. "Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market," Working Paper Series 1317, Research Institute of Industrial Economics.
    7. Vasudha Wattal, 2022. "Pricing of new pharmaceuticals and price regulation in India," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2022-02, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    8. Takalo, Tuomas, 2019. "Switching costs in the Finnish retail deposit market," Bank of Finland Research Discussion Papers 15/2019, Bank of Finland.
    9. Janssen, Aljoscha, 2020. "Price Dynamics of Swedish Pharmaceuticals," Working Paper Series 1325, Research Institute of Industrial Economics.
    10. Takalo, Tuomas, 2019. "Switching costs in the Finnish retail deposit market," Research Discussion Papers 15/2019, Bank of Finland.
    11. repec:zbw:bofrdp:2019_015 is not listed on IDEAS

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    More about this item

    Keywords

    Switching cost heterogeneity; Market share accumulation; Consumer foresight; Lock-in;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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