Some Implications of Search Costs for the Price Dynamics of Electronic Markets

Pedro Pereira

No 2, Working Papers from Portuguese Competition Authority

Abstract: This paper develops a model based on switching costs and technological uncertainty, which explains some aspects of the price dynamics of e-commerce. Switching costs and intertemporal cost correlation lock-in consumers. Firms initially charge low prices to build a customer base. If firms fail to reduce costs, and reservations prices are low, firms exit the industry. Over time, prices increase if no exit occurs, and decrease if exit occurs. Prices may also decrease over time, if the proportion of low search cost consumers increases.

Keywords: E-Commerce; Search; Switching Costs; Learning; Industry Evolution (search for similar items in EconPapers)
JEL-codes: D43 D83 L11 L13 L81 O31 O33 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-05
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