Working Paper: CEPR ID: DP8970
Authors: Lus M. B. Cabral
Abstract: In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.
Keywords: Price Competition; Switching Costs
JEL Codes: L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Switching costs (D23) | Equilibrium prices (D41) |
| Competitive market conditions (L13) | Equilibrium prices (D41) |
| Less competitive market conditions (L19) | Equilibrium prices (D41) |
| Small switching costs (D49) | Average price (P22) |
| Large switching costs (D49) | Average price (P22) |