Re-examining the Effects of Switching Costs

Rhodes, Andrew (2013): Re-examining the Effects of Switching Costs.

Abstract

Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

• Item Type: MPRA Paper
• Language: English
• Keywords: Switching costs, Dynamic competition, Markov perfect equilibrium
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; D - Microeconomics > D4 - Market Structure, Pricing, and Design; L - Industrial Organization > L0 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

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