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Dynamic Pricing in Customer Markets with Switching Costs

Author

Listed:
  • Luis Cabral

    (New York University)

Abstract

In a dynamic competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the results suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where sales take place with high frequency. (Copyright: Elsevier)

Suggested Citation

  • Luis Cabral, 2016. "Dynamic Pricing in Customer Markets with Switching Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 43-62, April.
  • Handle: RePEc:red:issued:13-75
    DOI: 10.1016/j.red.2015.09.002
    as

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    References listed on IDEAS

    as
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    7. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    8. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2016. "Heterogeneous switching costs," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 62-87.
    2. 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.
    3. Guillem Roig, 2017. "Duopolistic competition in markets where consumers have switching costs," DOCUMENTOS DE TRABAJO 015621, UNIVERSIDAD DEL ROSARIO.
    4. repec:kap:qmktec:v:15:y:2017:i:4:d:10.1007_s11129-017-9187-8 is not listed on IDEAS
    5. Shy, Oz & Stenbacka, Rune & Zhang, David Hao, 2016. "History-based versus uniform pricing in growing and declining markets," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 88-117.
    6. Siciliani, Paolo & Beckert, Walter, 2017. "Spatial models of heterogeneous switching costs," Bank of England working papers 689, Bank of England.

    More about this item

    Keywords

    Switching costs; Dynamic pricing; Customer markets;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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