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Enhancing Market Power by Reducing Switching Costs

  • Jan Bouckaert
  • Hans Degryse
  • Thomas Provoost

Competing firms often have the possibility to jointly determine the magnitude of consumers’ switching costs. Examples include compatibility decisions and the option of introducing number portability in telecom and banking. We put forward a model where firms jointly decide to reduce switching costs before competing in prices during two periods. We demonstrate that the outcome hinges crucially on how the joint action reduces consumers’ switching costs. In particular, firms will enhance their market power if they implementmeasures that reduce consumers’ switching costs by a lump sum. Conversely, they willpreserve market power by not implementing actions that reduce switching costsproportionally. Hence, when policy makers design consumer protection policies, they should not always adopt a favourable attitude towards efforts by firms to reduce switching costs.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-11/cesifo1_wp2449.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2449.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2449
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  1. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," TSE Working Papers 10-142, Toulouse School of Economics (TSE), revised 30 Oct 2012.
  2. Jan Bouckaert & Hans Degryse, 2004. "Softening Competition by Inducing Switching in Credit Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 27-52, 03.
  3. Garcia Marinoso, Begona, 2001. "Technological Incompatibility, Endogenous Switching Costs and Lock-In," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 281-98, September.
  4. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
  5. Gans, Joshua S. & King, Stephen P. & Woodbridge, Graeme, 2001. "Numbers to the people: regulation, ownership and local number portability," Information Economics and Policy, Elsevier, vol. 13(2), pages 167-180, June.
  6. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers.
  7. Stefan Buehler & Justus Haucap, 2004. "Mobile Number Portability," Journal of Industry, Competition and Trade, Springer, vol. 4(3), pages 223-238, 09.
  8. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  9. Vasso Ioannidou & Steven Ongena, 2010. ""Time for a Change": Loan Conditions and Bank Behavior when Firms Switch Banks," Journal of Finance, American Finance Association, vol. 65(5), pages 1847-1877, October.
  10. Shy, Oz, 2002. "A quick-and-easy method for estimating switching costs," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 71-87, January.
  11. Buehler, Stefan & Dewenter, Ralf & Haucap, Justus, 2005. "Mobile Number Portability in Europe," Working Paper 41/2005, Helmut Schmidt University, Hamburg.
  12. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  13. Fershtman, C. & Gandal, N., 1991. "Disadvantageous Semicollusion," Papers 37-91, Tel Aviv.
  14. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  15. Viard, V. Brian, 2005. "Do Switching Costs Make Markets More or Less Competitive? The Case of 800-Number Portability," Research Papers 1773r3, Stanford University, Graduate School of Business.
  16. Erland Nier & Celine Gondat-Larralde, 2004. "The Microeconomics Of Retail Banking - An Empirical Analysis Of The UK Market For Personal Current Accounts," Royal Economic Society Annual Conference 2004 110, Royal Economic Society.
  17. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
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