Switching Costs, Firm Size, and Market Structure

Simon Loertscher () and Yves Schneider ()

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: In many markets homogenous goods are sold both by large global firms ("chain stores") and small local firms. Surprisingly, chain stores often charge higher prices. Examples include hotels, airlines, and coffe shops. We provide a simple model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and change locations with a given probability. Consequently, chain stores insure consumers against switching costs. In equilibrium, chain stores charge higher prices, yet attract more consumers. Profits of local stores and chain stores increase with consumer mobility, but the latter do so faster.

Keywords: Firm size; switching costs; consumer mobility; market structure (search for similar items in EconPapers)
JEL-codes: D43 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mic
Date: 2005-11
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Working Paper: Switching Costs, Firm Size, and Market Structure (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:ube:dpvwib:dp0515

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