Competition When Consumers Have Switching Costs: An Overview

Paul Klemperer

No 704, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper surveys recent work on competition in markets in which consumers face costs to switching between competing firms' products, even when all firms' products are functionally identical. I address issues in macroeconomics, international trade and industrial organization: In a market with switching costs (or `brand loyalty'), a firm's current market share is an important determinant of its future profitability. I examine how the firm's choice between setting a low price to capture market share, and setting a high price to harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry, interest rates, exchange rate expectations, the state of the business cycle, etc. I also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

Keywords: Brand Loyalty; Lock-In; Switching Costs (search for similar items in EconPapers)
JEL-codes: D43 E30 F12 F31 L13 L16 M21 (search for similar items in EconPapers)
Date: 1992-07
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Citations: View citations in EconPapers (27)

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Working Paper: Competition when Consumers Have Switching Costs: An Overview (1992)
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