Dynamic Price Competition with Switching Costs
We develop a continuous-time dynamic model with switching costs. In a relatively simple Markov Perfect equilibrium, the dominant firm concedes market share by charging higher prices than the smaller firm. In the short-run, switching costs might have two types of anti-competitive effects: first, higher switching costs imply a slower transition to a symmetric market structure and a slower rate of decline for average prices; and second, if firms are sufficiently asymmetric, an increase in switching costs also leads to higher current prices. However, as market structure becomes more symmetric, price competition turns fiercer and in the long-run, switching costs have a pro-competitive effect. From a policy perspective, we conclude that switching costs should only raise concerns in concentrated markets.
|Date of creation:||Feb 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Rhodes, 2014.
"Re-examining the effects of switching costs,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
- Luís Cabral, 2011.
"Dynamic Price Competition with Network Effects,"
Review of Economic Studies,
Oxford University Press, vol. 78(1), pages 83-111.
- Luis Cabral, 2007. "Dynamic Price Competition with Network Effects," 2007 Meeting Papers 326, Society for Economic Dynamics.
- Luís Cabral, 2007. "Dynamic Price Competition with Network Effects," Working Papers 22, Portuguese Competition Authority.
- Cabral, Luis, 2009. "Dynamic price competition with network effects," IESE Research Papers D/843, IESE Business School.
- Cabral, Luís M B, 2008. "Dynamic Price Competition with Network Effects," CEPR Discussion Papers 6687, C.E.P.R. Discussion Papers.
- Luis Cabral, 2008. "Dynamic Price Competition with Network Effects," Working Papers 08-4, New York University, Leonard N. Stern School of Business, Department of Economics.
- Joseph Farrell & Carl Shapiro, 1988.
"Dynamic Competition with Switching Costs,"
RAND Journal of Economics,
The RAND Corporation, vol. 19(1), pages 123-137, Spring.
- Joseph Farrell and Carl Shapiro., 1988. "Dynamic Competition with Switching Costs," Economics Working Papers 8865, University of California at Berkeley.
- Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
- Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
- Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics, Springer, vol. 8(2), pages 167-205, June.
- Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013.
"The value of switching costs,"
Journal of Economic Theory,
Elsevier, vol. 148(3), pages 935-952.
- 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.
- Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," IDEI Working Papers 596, Institut d'Économie Industrielle (IDEI), Toulouse, revised 30 Oct 2012.
- Viard, V. Brian, 2005.
"Do Switching Costs Make Markets More or Less Competitive? The Case of 800-Number Portability,"
1773r3, Stanford University, Graduate School of Business.
- V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, 03.
- Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8849. 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: ()
If references are entirely missing, you can add them using this form.