Switching Costs, Cost of Debt, and Product Market Competition

Abstract

This paper studies switching cost induced cost of debt with product market competition and non-financial stakeholders. We find that consumer switching costs endogenously generate cost of debt, and the cost of debt is increasing in the switching cost, but decreasing in the degree of product market competition. Moreover, a firm's price is decreasing in its own debt, but increasing in its rival's debt. We also study the welfare implications and find that debt generally decreases both consumer surplus and social welfare.