Do Switching Costs Make Markets Less Competitive?

Jean-Pierre Dube, Guenter J. Hitsch () and Peter Rossi ()
Additional contact information
Guenter J. Hitsch: GSB University of Chicago

No 514, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: The conventional wisdom in economic theory holds that switching costs make markets less competitive. This paper challenges this claim. We find that steady-state equilibrium prices may fall as switching costs are introduced into a dynamic pricing model. To assess whether this finding is of empirical relevance, we consider a general model with differentiated products, imperfect lock-in and a large number of consumer types. We calibrate this model with data from a frequently purchased packaged goods market, where consumers exhibit brand loyalty, a specific form of switching costs. We are able to estimate the level of switching costs from the brand choice behavior in this data. At switching costs of the order of magnitude found in our data, prices are lower than in the situation without switching costs

Keywords: Switching Costs; Dynamic Oligopoly; Bayesian Econometrics (search for similar items in EconPapers)
JEL-codes: L10 L13 (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (6)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:514

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().