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The value of switching costs

  • Biglaiser, Gary
  • Crémer, Jacques
  • Dobos, Gergely

We study a dynamic model with an incumbent monopolist and entry in every subsequent period. We first show that if all consumers have the same switching cost, then the intertemporal profits of the incumbent are the same as if there was only one period. We then study the consequences of heterogeneity of switching costs. We prove that even low switching cost customers have value for the incumbent: when there are more of them its profits increase as their presence hinders entrants who find it more costly to attract high switching cost customers.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-142.

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Date of creation: 03 Feb 2010
Date of revision: 30 Oct 2012
Publication status: Published in Journal of Economic Theory, vol.�148, n°3, mai 2013, p.�935-952.
Handle: RePEc:tse:wpaper:22323
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  1. Anderson, Eric T. & Kumar, Nanda & Rajiv, Surendra, 2004. "A comment on: "Revisiting dynamic duopoly with consumer switching costs"," Journal of Economic Theory, Elsevier, vol. 116(1), pages 177-186, May.
  2. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
  3. 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.
  4. Joseph Farrell and Carl Shapiro., 1988. "Dynamic Competition with Switching Costs," Economics Working Papers 8865, University of California at Berkeley.
  5. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  6. Yuxin Chen & Jinhong Xie, 2007. "Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage," Marketing Science, INFORMS, vol. 26(1), pages 52-66, 01-02.
  7. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-46, Summer.
  8. Jan Bouckaert & Hans Degryse & Thomas Provoost, 2008. "Enhancing Market Power by Reducing Switching Costs," CESifo Working Paper Series 2449, CESifo Group Munich.
  9. Viard, V. Brian, 2005. "Do Switching Costs Make Markets More or Less Competitive? The Case of 800-Number Portability," Research Papers 1773r3, Stanford University, Graduate School of Business.
  10. Gary Biglaiser & Jacques Crémer, 2011. "Equilibria in an infinite horizon game with an incumbent, entry and switching costs," International Journal of Economic Theory, The International Society for Economic Theory, vol. 7(1), pages 65-75, 03.
  11. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  12. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  13. Jiawei Chen, 2011. "How do Switching Costs Affect Market Concentration and Prices in Network Industries?," 2011 Meeting Papers 1428, Society for Economic Dynamics.
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