Enhancing Market Power by Reducing Switching Costs

30 Pages Posted: 28 Oct 2008

See all articles by Jan Bouckaert

Jan Bouckaert

University of Antwerp - Department of Economics

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Thomas Provoost

Catholic University of Leuven (KUL)

Date Written: November 2008

Abstract

Competing firms often have the possibility to jointly determine the magnitude of consumers' switching costs. Examples include compatibility decisions and the option of introducing number portability in telecom and banking. We put forward a model where firms jointly decide to reduce switching costs before competing in prices during two periods. We demonstrate that the outcome hinges crucially on how the joint action reduces consumers' switching costs. In particular, firms will enhance their market power if they implement measures that reduce consumers' switching costs by a lump sum. Conversely, they will preserve market power by not implementing actions that reduce switching costs proportionally. Hence, when policy makers design consumer protection policies, they should not always adopt a favorable attitude towards efforts by firms to reduce switching costs.

Keywords: switching costs, market power, welfare

JEL Classification: D43, G28

Suggested Citation

Bouckaert, Jan and Degryse, Hans and Provoost, Thomas, Enhancing Market Power by Reducing Switching Costs (November 2008). CentER Discussion Paper Series No. 2008-91; TILEC Discussion Paper No. 2008-038; CESifo Working Paper Series No. 2449. Available at SSRN: https://ssrn.com/abstract=1290634

Jan Bouckaert (Contact Author)

University of Antwerp - Department of Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium
+32 3 220 4055 (Phone)

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas Provoost

Catholic University of Leuven (KUL) ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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