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Local interactions under switching costs

Author

Listed:
  • Ge Jiang

    (Nanjing University)

  • Simon Weidenholzer

    () (University of Essex)

Abstract

We study the impact of switching costs on the long-run outcome in $$2\times 2$$ 2 × 2 coordination games played in the circular city model of local interactions. For low levels of switching costs, the predictions are in line with the previous literature and the risk-dominant convention is the unique long-run equilibrium. For intermediate levels of switching costs, the set of long-run equilibria still contain the risk-dominant convention but may also contain conventions that are not risk dominant. The set of long-run equilibria may further be non-monotonic in the level of switching costs, i.e., as switching costs increase the prediction that the risk-dominant convention is the unique long-run equilibrium and the prediction that both conventions are long-run equilibria alternate. Finally, for high levels of switching costs, also non-monomorphic states will be included in the set of long-run equilibria.

Suggested Citation

  • Ge Jiang & Simon Weidenholzer, 2017. "Local interactions under switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(3), pages 571-588, October.
  • Handle: RePEc:spr:joecth:v:64:y:2017:i:3:d:10.1007_s00199-016-1002-3
    DOI: 10.1007/s00199-016-1002-3
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    References listed on IDEAS

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