Working Paper: CEPR ID: DP704
Authors: Paul Klemperer
Abstract: This paper surveys recent work on competition in markets in which consumers face costs to switching between competing firms' products, even when all firms' products are functionally identical. I address issues in macroeconomics, international trade and industrial organization: In a market with switching costs (or `brand loyalty'), a firm's current market share is an important determinant of its future profitability. I examine how the firm's choice between setting a low price to capture market share, and setting a high price to harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry, interest rates, exchange rate expectations, the state of the business cycle, etc. I also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.
Keywords: switching costs; lock-in; brand loyalty
JEL Codes: 043; E30; F12; F31; L13; L16; M21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switching costs (D23) | monopoly power (D42) |
| monopoly power (D42) | future profitability based on market share (L21) |
| switching costs (D23) | pricing strategies (D49) |
| interest rates (E43) | pricing (D49) |
| switching costs (D23) | pricing strategy (L11) |
| switching costs (D23) | product differentiation incentives (L15) |