Abstract

http://ssrn.com/abstract=907227
 
 

References (26)



 
 

Citations (13)



 


 



Do Switching Costs Make Markets Less Competitive?


Jean-Pierre H. Dube


University of Chicago - Booth School of Business

Guenter J. Hitsch


University of Chicago - Booth School of Business

Peter E. Rossi


University of California, Los Angeles (UCLA) - Anderson School of Management

September 2008


Abstract:     
The conventional wisdom in economic theory holds that switching costs make markets less competitive. This paper challenges this claim. We find that steady-state equilibrium prices may fall as switching costs are introduced into a simple model of dynamic price competition that allows for differentiated products and imperfect lock-in. To assess whether this finding is of empirical relevance, we consider a more general model with heterogeneous consumers. We calibrate this model with data from a frequently purchased packaged goods market where consumers exhibit inertia in their brand choices, a behavior consistent with switching costs. We estimate the level of switching costs from the brand choice behavior in this data. At switching costs of the order of magnitude found in our data, prices are lower than without switching costs.

Number of Pages in PDF File: 47

Keywords: switching costs, dynamic model, brand loyalty, state dependence

JEL Classification: D1, D4, L1, M3

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Date posted: June 13, 2006 ; Last revised: February 6, 2009

Suggested Citation

Dube, Jean-Pierre H. and Hitsch, Guenter J. and Rossi , Peter E., Do Switching Costs Make Markets Less Competitive? (September 2008). Available at SSRN: http://ssrn.com/abstract=907227 or http://dx.doi.org/10.2139/ssrn.907227

Contact Information

Jean-Pierre H. Dube
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube
Guenter J. Hitsch
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Peter E. Rossi (Contact Author)
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)
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