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Switching Costs, Firm Size, and Market Structure

  • Simon Loertscher

    ()

    (Economic Department, University of Berne)

  • Yves Schneider

    ()

    (Socioeconomic Institute, University of Zurich)

In many markets, homogenous goods and services are sold both by large global frms and small local frms. Surprisingly, the large frms charge, often substantially, higher prices. Examples include hotels, airlines, and coffee shops. This paper provides a parsimonious model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and consumers change locations with a given positive probability. Consequently, large frms or "chain stores" insure consumers against this switching cost. The model predicts that chain stores and local stores coexist in equilibrium and that chain stores charge higher prices and yet attract more consumers than local stores. As consumer mobility increases, the profits of both local stores and chain stores increase, but the chain stores' profts increase at a faster rate.

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File URL: http://www.econ.uzh.ch/static/wp_soi/wp0508.pdf
File Function: First version, 2005
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0508.

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Length: 29 pages
Date of creation: Aug 2005
Date of revision:
Publication status: forthcoming in Journal of Institutional and Theoretical Economics
Handle: RePEc:soz:wpaper:0508
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