Article

Re-examining the effects of switching costs

Andrew Rhodes

Abstract

Consumers often incur costs when switching from one product to another. Recently, there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that even if switching costs reduce prices in the long run, they may still increase prices in the short run. Finally, switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

Keywords

Switching costs; Dynamic competition; Markov perfect equilibrium; Linear-quadratic games;

JEL codes

  • D21: Firm Behavior: Theory
  • L11: Production, Pricing, and Market Structure • Size Distribution of Firms

Reference

Andrew Rhodes, Re-examining the effects of switching costs, Economic Theory, Springer Berlin / Heidelberg, vol. 57, n. 1, September 2014, pp. 161–194.

Published in

Economic Theory, Springer Berlin / Heidelberg, vol. 57, n. 1, September 2014, pp. 161–194