Markets with Search and Switching Costs

Wilson, Chris (2006): Markets with Search and Switching Costs.

Abstract

By incorporating the additional existence of switching costs into an oligopoly search model by Stahl (1989), this paper dispels the misleading idea that search costs can simply be treated as a form of switching cost. Due to the assumption that search costs, unlike switching costs, are incurred unconditionally on the decision to switch suppliers it is shown that the anticompetitive effects of search costs are consistently larger than those from an equivalent level of switching costs. The finding suggests that obfuscation practices that aim to deter consumers from searching, such as competing on deliberately complex tariffs, may be particularly powerful relative to practices that increase the costs of substitution between firms, such as loyalty programs or termination fees.

• Item Type: MPRA Paper
• Language: English
• Keywords: Search costs; Switching costs; Obfuscation
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

Baye M.R., Morgan J. and Scholten P. (forthcoming) “Information, Search and Price Dispersion” in Handbook on Economics and Information Systems, Elsevier

Beggs A. and Klemperer P. (1992) “Multiperiod Competition with Switching Costs” Econometrica vol.60 p. 651-666

Chang Y., Waddams Price C. and Wilson C.M. (forthcoming) “Search and Switching Across Relationship Markets” ESRC Centre for Competition Policy Working Paper

Chen Y. (1997) “Paying Consumers to Switch” Journal of Economics and Management Strategy vol.6 p.877-897

DeGroot M.H. (1970) “Optimal Statistical Decisions” McGraw-Hill New York

Ellison G. and Ellison S.F. (2004) “Search, Obfuscation and Price Elasticities on the Internet” NBER Working Paper 10570

Farrell J. and Klemperer P. (2006) “Coordination and Lock-In: Competition with Switching Costs and Network Effects” Preliminary Draft 2006

Giulietti M., Waddams Price C. and Waterson M. (2005) “Consumer Choice and Competition Policy: A Study of UK Energy Markets” Economic Journal vol. 115 p.949-968

Ireland N. J. (forthcoming) “Posting Multiple Prices to Reduce the Effectiveness of Consumer Price Search” Journal of Industrial Economics

Janssen M. and Moraga-González J.L. (2004) “Strategic Pricing, Consumer Search and the Number of Firms” Review of Economic Studies vol.71 p.1089-1118

Janssen M., Moraga-González J.L. and Wildenbeest M.R. (2005) “Truly Costly Sequential Search and Oligopolisitic Pricing” International Journal of Industrial Organisation vol.23 p.451-466

Kim M., Kliger D. and Vale B. (2003) “Estimating Switching Costs: The Case of Banking” Journal of Financial Intermediation vol.12 p.25-56

Klemperer P. (1987) “Entry Deterrence in Markets with Consumer Switching Costs” Economic Journal vol.97 p.99-117

Klemperer P. (1995) “Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organisation, Macroeconomics and International Trade” Review of Economic Studies vol.62 p.515-539

Knittel C.R. (1997) “Interstate Long Distance Rates: Search Costs, Switching Costs and Market Power” Review of Industrial Organisation vol.12 p.519-536

Moraga-González J.L. and Wildenbeest M.R. (2006) “Maximum Likelihood Estimation of Search Costs” Working Paper January 2006

Morgan J., Orzen H. and Sefton M. (2006) “An Experimental Study of Price Dispersion” Games and Economic Behaviour vol. 54(1) p.134-158

Moshkin N.V. and Shachar R. (2002) “The Asymmetric Information Model of State Dependence” Marketing Science vol. 21(4) p.435-454

OFT (2003) “Switching Costs” Office of Fair Trading, Economic Discussion Paper 5, April 2003

Overgaard P.B. and Møllgaard H.P. (2005) “Information Exchange, Market Transparency and Dynamic Oligopoly” in Issues in Competition Law and Policy (Ed) Collins W.D., American Bar Association

Padilla A. (1995) “Dynamic Duopoly with Consumer Switching Costs” Journal of Economic Theory vol. 67 p.520-530

Rangel L. (2005) “Should I Stay or Should I Go?: The Determinants of Consumer’s Decision to Switch Suppliers” Working paper May 2005

Schlesinger H. and Schulenberg J.G. (1991) “Search Costs, Switching Costs and Product Heterogeneity in an Insurance Market” Journal of Risk and Insurance vol.58 p.109-19

Shaffer, G. and Zhang Z.J. (2000) “Pay to Switch or Pay to Stay: Preference-Based Price Discrimination and Markets with Switching Costs” Journal of Economics and Management Strategy vol.9 p.397-424

Spiegler R. (2005) “Competition Over Agents with Boundedly Rational Expectations” Theoretical Economics vol. 1(2) p.207-231

Stahl D. O. (1989) “Oligopolisitic Pricing with Sequential Consumer Search” American Economic Review vol.79 p.700-712

Sturluson J.T. (2002a) “Price Duopoly in a Default Service Market with Search and Switching Costs” Working Paper

Sturluson J.T. (2002b) “The Importance of Consumer Search and Switching Costs for Competition in Electric Power Retailing” Working Paper July 2002

Varian H.R. (1980) “A Model of Sales” American Economic Review vol.70 p.651-659

Waterson M. (2003) “The Role of Consumers in Competition and Competition Policy” International Journal of Industrial Organization vol.21 p. 129-150

Weitzman M.L. (1979) “Optimal Search for the Best Alternative” Econometrica vol. 47 p.641-654

Wilson C.M. (2005) “The Effects of Consumer Protection on Deception, Consumer Search and Competition” ESRC Centre for Competition Policy Working Paper 05-9