Dynamic Price Competition with Switching Costs

Natalia Fabra and García, Alfredo

No 8849, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a continuous-time dynamic model with switching costs. In a relatively simple Markov Perfect equilibrium, the dominant firm concedes market share by charging higher prices than the smaller firm. In the short-run, switching costs might have two types of anti-competitive effects: first, higher switching costs imply a slower transition to a symmetric market structure and a slower rate of decline for average prices; and second, if firms are sufficiently asymmetric, an increase in switching costs also leads to higher current prices. However, as market structure becomes more symmetric, price competition turns fiercer and in the long-run, switching costs have a pro-competitive effect. From a policy perspective, we conclude that switching costs should only raise concerns in concentrated markets.

Keywords: Firms' asymmetries; Switching costs; Continuous-time model; Markov-perfect equilibrium (search for similar items in EconPapers)
JEL-codes: C61 L13 L41 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-bec and nep-com
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Citations: View citations in EconPapers (5)

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