Working Paper: CEPR ID: DP436
Authors: Alan Beggs; Paul Klemperer
Abstract: We analyse an infinite-period model of duopolistic competition in a market with consumer switching costs, in which in every period new consumers arrive and a fraction of old consumers leaves. We show that prices (and profits) are higher than in a market without switching costs, and that this result does not depend importantly on the specific assumptions of our model. We show that switching costs make the market more attractive to a new entrant, even though an entrant must overcome the disadvantage that a large fraction of the market is already committed to the incumbent's product. We examine the evolution of prices and of firms' market shares, and show how these are affected by differences between firms' costs, interest rates, the rate of turnover of consumers and growth in the size of the market. We also show how to use our model to examine macroeconomic issues.
Keywords: switching costs; lock-in; duopolistic competition
JEL Codes: 022; 611
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switching costs (D23) | higher prices (D49) |
| switching costs (D23) | higher profits (D33) |
| switching costs (D23) | increased market power for firms (L11) |
| higher prices (D49) | higher price-cost margin (D43) |
| switching costs (D23) | attractiveness of entering a market (F23) |
| switching costs (D23) | tendency to maintain higher prices (L11) |
| consumer turnover and growth rates (J60) | influence on pricing strategies (L11) |