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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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    Citations

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    Cited by:

    1. Kusi, Baah & Agbloyor, Elikplimi & Gyeke-Dako, Agyapomaa & Asongu, Simplice, 2020. "Financial Sector Transparency, Financial Crises and Market Power: A Cross-Country Evidence," MPRA Paper 107513, University Library of Munich, Germany.
    2. 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).
    3. Janssen, Aljoscha, 2020. "Switching Costs, Brand Premia and Behavioral Pricing in the Pharmaceutical Market," Working Paper Series 1317, Research Institute of Industrial Economics.
    4. Janssen, Aljoscha, 2020. "Price Dynamics of Swedish Pharmaceuticals," Working Paper Series 1325, Research Institute of Industrial Economics.
    5. Takalo, Tuomas, 2019. "Switching costs in the Finnish retail deposit market," Research Discussion Papers 15/2019, Bank of Finland.

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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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