Working Paper: CEPR ID: DP846
Authors: A. Jorge Padilla
Abstract: The degree of collusiveness of a market with consumer switching costs is studied in an infinite-horizon overlapping-generations model of duopolistic competition. In contrast to previous models of switching costs, this paper assumes that firms compete for the demand for a homogeneous good by setting prices simultaneously in each period. It characterizes the unique symmetric stationary Markovian perfect equilibrium of this game and shows that the existence of switching costs unambiguously relaxes price competition in equilibrium. It also shows that, on the contrary, tacit collusion is more difficult to sustain in a market with consumer switching costs since the severity of the optimal punishments is reduced.
Keywords: switching costs; dynamic programming; markov perfect equilibrium; tacit collusion; optimal punishments; entry deterrence
JEL Codes: C73; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switching costs (D23) | price competition (D41) |
| switching costs (D23) | prices (P22) |
| switching costs (D23) | profits (L21) |
| switching costs (D23) | tacit collusion (D43) |
| switching costs (D23) | optimal punishments (K42) |
| optimal punishments (K42) | incentives to adhere to collusion (D43) |
| customer base size (L25) | future profitability (L21) |
| customer base size (L25) | entry deterrence (K42) |