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Competition When Consumers Have Switching Costs: An Overview

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  • Klemperer, Paul

Abstract

This paper surveys recent work on competition in markets in which consumers face costs to switching between competing firms' products, even when all firms' products are functionally identical. I address issues in macroeconomics, international trade and industrial organization: In a market with switching costs (or `brand loyalty'), a firm's current market share is an important determinant of its future profitability. I examine how the firm's choice between setting a low price to capture market share, and setting a high price to harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry, interest rates, exchange rate expectations, the state of the business cycle, etc. I also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

Suggested Citation

  • Klemperer, Paul, 1992. "Competition When Consumers Have Switching Costs: An Overview," CEPR Discussion Papers 704, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:704
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    Cited by:

    1. Michal Grajek, 2003. "Estimating Network Effects and Compatibility in Mobile Telecommunications," CIG Working Papers SP II 2003-26, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    2. Norbäck, Pehr-Johan & Persson, Lars, 2003. "Privatization and Restructuring in Concentrated Markets," Working Paper Series 605, Research Institute of Industrial Economics.
    3. Luca Lambertini, 2003. "The monopolist's optimal R&D portfolio," Oxford Economic Papers, Oxford University Press, vol. 55(4), pages 561-578, October.
    4. Antonelli, Cristiano, 2004. "Localized product innovation: the role of proximity in the Lancastrian product space," Information Economics and Policy, Elsevier, vol. 16(2), pages 255-274, June.
    5. Lutz, Clemens & Kemp, Ron & Dijkstra, S. Gerhard, 2007. "SME's perceptions regarding strategic and structural entry barriers," Research Report 07009, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    6. Bronwyn H. Hall & Beethika Khan, 2003. "Adoption of New Technology," NBER Working Papers 9730, National Bureau of Economic Research, Inc.
    7. Elizabeth K. Kiser, 2004. "Modeling the whole firm: the effect of multiple inputs and financial intermediation on bank deposit rates," Finance and Economics Discussion Series 2004-07, Board of Governors of the Federal Reserve System (U.S.).
    8. Slobodan Djajić & Sajal Lahiri & Pascalis Raimondos-Møller, 2004. "Logic of Aid in an Intertemporal Setting," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 151-161, February.
    9. Hendrik Hakenes & Martin Peitz, 2007. "Observable Reputation Trading," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 693-730, May.
    10. Curtis Eberwein & Ted To, 1998. "Dynamic Price Adjustment Under Imperfect Competition," Industrial Organization 9803002, EconWPA.
    11. Martinez Granado, Maite & Siotis, Georges, 2006. "Computing Abuse Related Damages in the Case of New Entry: An Illustration for the Directory Enquiry Services Market," CEPR Discussion Papers 5813, C.E.P.R. Discussion Papers.
    12. Pedro Dal Bó, 2007. "Tacit collusion under interest rate fluctuations," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 533-540, June.
    13. Gual, Jordi, 1999. "Deregulation, integration and market structure in European banking," IESE Research Papers D/397, IESE Business School.
    14. Gual, Jordi, 1999. "Deregulation, Integration, and Market Structure in European Banking," Journal of the Japanese and International Economies, Elsevier, vol. 13(4), pages 372-396, December.
    15. Gual, Jordi, 1999. "Deregulation, Integration and Market Structure in European Banking," CEPR Discussion Papers 2288, C.E.P.R. Discussion Papers.
    16. Michal Grajek, 2002. "Identification of Network Externalities in Markets for Non-Durables," CIG Working Papers FS IV 02-32, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    17. repec:dgr:rugsom:07009 is not listed on IDEAS
    18. Kallio, Panu K.S. & Abbott, Philip C., 1998. "Export Subsidies And Switching Costs In An Imperfectly Competitive International Wheat Market," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20789, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    19. Clemens Lutz & Ron Kemp & S. Gerhard Dijkstra, 2010. "Perceptions regarding strategic and structural entry barriers," Small Business Economics, Springer, vol. 35(1), pages 19-33, July.

    More about this item

    Keywords

    Brand Loyalty; Lock-In; Switching Costs;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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