IDEAS home Printed from
   My bibliography  Save this article

Price Wars Caused by Switching Costs


  • Paul Klemperer


In many markets consumers have "switching costs", for example learning costs or transaction costs, of changing between functionally equivalent brands of a product, or of using any brand for the first time. We analyse a four-period complete-information model of a market with switching costs in which new entry occurs after the second period. The new entry results, in equilibrium, in a price war. That is, the new entrants' prices are higher in the post-entry period than in the entry period, and the incumbent's price falls in either the pre-entry period or the entry period and subsequently rises. We can interpret the incumbent's lowering its price in the pre-entry period as limit-pricing behaviour. We distinguish between two types of price war that can occur, and show how the type or mixture of types that arises depends on the size of switching costs.

Suggested Citation

  • Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
  • Handle: RePEc:oup:restud:v:56:y:1989:i:3:p:405-420.

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Bronwyn H. Hall & Clint Cumminq & Elizabeth S. Laderman & Joy Mundy, 1988. "The R&D Master File Documentation," NBER Technical Working Papers 0072, National Bureau of Economic Research, Inc.
    2. Adam B. Jaffe, 1984. "Market Demand, Technological Opportunity and Research Spillovers on R&D Intensity and Productivity Growth," NBER Working Papers 1432, National Bureau of Economic Research, Inc.
    3. Richard Levin & Peter C. Reiss, 1984. "Tests of a Schumpeterian Model of R&D and Market Structure," NBER Chapters,in: R&D, Patents, and Productivity, pages 175-208 National Bureau of Economic Research, Inc.
    4. Richard R. Nelson, 1982. "The Role of Knowledge in R&D Efficiency," The Quarterly Journal of Economics, Oxford University Press, vol. 97(3), pages 453-470.
    5. McLaren, Keith R & Cooper, Russel J, 1980. "Intertemporal Duality: Application to the Theory of the Firm," Econometrica, Econometric Society, vol. 48(7), pages 1755-1762, November.
    6. Epstein, Larry G. & Yatchew, Adonis J., 1985. "The empirical determination of technology and expectations : A simplified procedure," Journal of Econometrics, Elsevier, vol. 27(2), pages 235-258, February.
    7. Morrison, C. J. & Berndt, E. R., 1981. "Short-run labor productivity in a dynamic model," Journal of Econometrics, Elsevier, vol. 16(3), pages 339-365, August.
    8. Mortensen, Dale T, 1973. "Generalized Costs of Adjustment and Dynamic Factor Demand Theory," Econometrica, Econometric Society, vol. 41(4), pages 657-665, July.
    9. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    10. Larry G. Epstein, 1981. "Duality Theory and Functional Forms for Dynamic Factor Demands," Review of Economic Studies, Oxford University Press, vol. 48(1), pages 81-95.
    11. Epstein, Larry G & Denny, Michael G S, 1983. "The Multivariate Flexible Accelerator Model: Its Empirical Restrictions and an Application to U.S. Manufacturing," Econometrica, Econometric Society, vol. 51(3), pages 647-674, May.
    12. Evenson, Robert E & Kislev, Yoav, 1973. "Research and Productivity in Wheat and Maize," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1309-1329, Nov.-Dec..
    13. Treadway, Arthur B., 1974. "The globally optimal flexible accelerator," Journal of Economic Theory, Elsevier, vol. 7(1), pages 17-39, January.
    14. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:56:y:1989:i:3:p:405-420.. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.