Do Switching Costs Make Markets Less Competitive?
The conventional wisdom in economic theory holds that switching costs make markets less competitive. This paper challenges this claim. We find that steady-state equilibrium prices may fall as switching costs are introduced into a dynamic pricing model. To assess whether this finding is of empirical relevance, we consider a general model with differentiated products, imperfect lock-in and a large number of consumer types. We calibrate this model with data from a frequently purchased packaged goods market, where consumers exhibit brand loyalty, a specific form of switching costs. We are able to estimate the level of switching costs from the brand choice behavior in this data. At switching costs of the order of magnitude found in our data, prices are lower than in the situation without switching costs
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|Date of creation:||03 Dec 2006|
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