Let's lock them in: Collusion under consumer switching costs

Niklas Fourberg

International Journal of Industrial Organization, 2023, vol. 91, issue C

Abstract: Consumer switching costs reduce the price elasticity of existing customers while increasing competition for new ones, creating an “invest-and-harvest” incentive for firms. This paper examines the effect of this dual pricing incentive on firm behavior in a laboratory experiment both with and without switching costs and the ability to communicate. I find that switching costs reduce the price level for new consumers, while the price level for existing consumers is unaffected and the “harvesting” effect is comparatively muted. Markets with switching costs are more competitive and less tacitly collusive. Moreover, switching costs provide a focal point for price setting in the form of a minimum marginal cost mark-up, which is frequently chosen in tacit market sharing outcomes. The results have implications for antitrust policy.

Keywords: Switching costs; Cartels; Collusion; Experiments (search for similar items in EconPapers)
JEL-codes: C7 C9 L13 L41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:91:y:2023:i:c:s0167718723000875

DOI: 10.1016/j.ijindorg.2023.103018

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