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Estimating Switching Costs and Oligopolistic Behavior

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  • Moshe Kim
  • Doron Kliger
  • Bent Vale

Abstract

We present an empirical model of firm behavior in the presence of switching costs. Customers' transition probabilities, embedded in firms' value maximization, are used in a multi-period model to derive estimable equations of a first order condition, market-share (demand), and supply equations. The novelty of the model is in its ability to extract information on both the magnitude and significance of switching costs, as well as on customers' transition probabilities, from conventionally available highly aggregated data which do not contain customer-specific information. As a matter of illustration, the model is applied to a panel data of banks, to assess the switching costs in the market for bank loans. The point estimate of the average switching cost is 4.1% which is about one third of the market average interest rate on loans. More than a quarter of the customer's added value is attributed to the lock-in phenomenon generated by these switching costs. About a third of the average bank's market share is due to its established bank-borrower relationship.

Suggested Citation

  • Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:01-13
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    File URL: http://fic.wharton.upenn.edu/fic/papers/01/0113.pdf
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    Cited by:

    1. Céline Gondat-Larralde & Erlend Nier, 2006. "Switching costs in the market for personal current accounts: some evidence for the United Kingdom," Bank of England working papers 292, Bank of England.
    2. Pei-Yu (Sharon) Chen & Lorin M. Hitt, 2002. "Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry," Information Systems Research, INFORMS, vol. 13(3), pages 255-274, September.
    3. Gabrielsen, Tommy Staahl & Vagstad, Steinar, 2003. "Consumer heterogeneity, incomplete information and pricing in a duopoly with switching costs," Information Economics and Policy, Elsevier, vol. 15(3), pages 384-401, September.
    4. António Pedro Soares Pinto & Mário Gomes Augusto & Pedro M. Gama, 2010. "Bank Relationships And Corporate Governance: A Survey Of The Literature From The Perspective Of Smes," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 65-85.
    5. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
    6. Elizabeth K. Kiser, 2002. "Household switching behavior at depository institutions: evidence from survey data," Finance and Economics Discussion Series 2002-44, Board of Governors of the Federal Reserve System (US).
    7. Fredrik Carlsson & Åsa Lofgren, 2006. "Airline choice, switching costs and frequent flyer programmes," Applied Economics, Taylor & Francis Journals, vol. 38(13), pages 1469-1475.
    8. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 344-352, April.
    9. 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, March.
    10. Timothy H. Hannan & Robert M. Adams, 2011. "Consumer Switching Costs And Firm Pricing: Evidence From Bank Pricing Of Deposit Accounts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 296-320, June.
    11. Elizabeth Kiser, 2002. "Predicting Household Switching Behavior and Switching Costs at Depository Institutions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(4), pages 349-365, June.
    12. Chun‐Yu Ho, 2015. "Switching Cost And Deposit Demand In China," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 723-749, August.
    13. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2011. "Crisis Resolution and Bank Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2166-2205.
    14. Gehrig, Thomas & Stenbacka, Rune, 2007. "Information sharing and lending market competition with switching costs and poaching," European Economic Review, Elsevier, vol. 51(1), pages 77-99, January.

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