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Asymmetric switching costs can improve the predictive power of shy's model

Listed author(s):
  • Evens Salies

    (Observatoire français des conjonctures économiques)

Economists Oz Shy introduced the definition of undercut-proof property (“UPP”) prices in a model of Bertrand competition involving loyal consumers (‘A quick-and-easy method for estimating switching costs’, International Journal of Industrial Organization, Vol. 20, pp. 71-87, 2002). Shy’s seminal paper allows applied researchers to measure the switching costs faced by locked-in consumers. Although there is increasing interest in demonstrating consumer inertia in retail markets opened up to competition, Shy’s approach has not received much attention. The present paper shows that the UPP’s lack of appeal in this context stems from a strong assumption of identical switching costs in the theoretical model, whereas real data are more likely to reveal asymmetric values for these costs. We revisit the UPP by considering asymmetric switching costs straight from the theoretical model. Doing so enables us to show that more rigorous conditions relating the values of switching costs to market shares are necessary in order for UPP prices to be valid predictions of these costs, which consequently increases the predictive power of Shy’s model. This improvement is illustrated with two examples borrowed from Shy’s paper.

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File URL: http://spire.sciencespo.fr/hdl:/2441/53r60a8s3kup1vc9ji1hni539/resources/wp2012-14.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number 2012-14.

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Date of creation: Apr 2012
Handle: RePEc:spo:wpmain:info:hdl:2441/53r60a8s3kup1vc9ji1hni539
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  1. Orzen, Henrik & Sefton, Martin, 2008. "An experiment on spatial price competition," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 716-729, May.
  2. Jackie Krafft & Evens Salies, 2006. "The cost of switching Internet providers in the French broadband industry, or why ADSL has diffused faster than other innovative technologies"," Documents de Travail de l'OFCE 2006-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Jackie Krafft & Evens Salies, 2008. "The cost of switching Internet providers in the broadband industry, or why ADSL has diffused faster than other innovative technologies: Evidence from the French case," Post-Print hal-00203512, HAL.
  4. Peeters, Ronald & Strobel, Martin, 2009. "Pricing behavior in asymmetric markets with differentiated products," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 24-32, January.
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