Re-examining the effects of switching costs

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 switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

Compatibility Choices, Switching Costs, and Data Portability

“…However, Doganoglu (2010) considers neither poaching nor compatibility choices. To some extent, our model is similar to Somaini and Einav (2013), Rhodes (2014), Cabral (2016) and Lam (2017), which assume that consumers' locations are independently and identically distributed over an Hotelling line across periods. Even if we do not formally make such assumption, a model with such assumption will generate exactly the same predictions as our current model.…”

“…of g 2 . Although the IID assumption looks restrictive, this is a standard assumption in the literature on switching costs (for instance, see Somani and Einav (2013), Rhodes (2014), Cabral (2016) and Lam (2017)).…”

Empirical Industrial Organization Economics to Analyze Developing Country Food Value Chains

“…Such Markov perfect equilibria can explain many other phenomena than the Walmart example above and sometimes lead to findings that are counter to conventional thinking. For example, although orthodox theory maintains that switching costs, or the cost a consumer bears from moving from one vendor to another, must be anticompetitive, Cabral (2009), Rhodes (2014), and Arie & Grieco (2014) each present theoretical support for the notion that switching costs can instead reduce prices and lead to more competitive industry outcomes. Cabral (2009) and Rhodes (2014) explain this observation as a possible result of price discrimination-retailers attract switchers through lower prices.…”

Pricing Strategies of Food Retailers

“…If food consumers' purchases, whether at the brand or store level, are indeed state dependent, then the equilibrium prices may differ qualitatively from static prices. In the theoretical literature on this issue, Rhodes (2014), Villas-Boas (2015), and Cabral (2016) show how loyalty, or switching costs more generally, can potentially be procompetitive, even in a market with frequently purchased consumer goods. At the very least, stores have an incentive to compensate consumers for switching through lower prices (Arie & Grieco 2014).…”