Switching Costs and Equilibrium Prices

Luis Cabral

No 8970, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.

Keywords: Price competition; Switching costs (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (4)

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