Enhancing Market Power by Reducing Switching Costs

Jan Bouckaert, Hans Degryse and Thomas Provoost

No 2449, CESifo Working Paper Series from CESifo

Abstract: Competing firms often have the possibility to jointly determine the magnitude of consumers’ switching costs. Examples include compatibility decisions and the option of introducing number portability in telecom and banking. We put forward a model where firms jointly decide to reduce switching costs before competing in prices during two periods. We demonstrate that the outcome hinges crucially on how the joint action reduces consumers’ switching costs. In particular, firms will enhance their market power if they implement measures that reduce consumers’ switching costs by a lump sum. Conversely, they will preserve market power by not implementing actions that reduce switching costs proportionally. Hence, when policy makers design consumer protection policies, they should not always adopt a favourable attitude towards efforts by firms to reduce switching costs.

Keywords: switching costs; market power; welfare (search for similar items in EconPapers)
JEL-codes: D43 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Enhancing market power by reducing switching costs (2010)
Working Paper: Enchancing market power by reducing switching costs (2010)
Working Paper: Enhancing Market Power by Reducing Switching Costs (2008)
Working Paper: Enhancing Market Power by Reducing Switching Costs (2008)
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