Switching Costs or Search Costs?

The Foerder Institute for Economic Research Working Paper No. 3-2000

42 Pages Posted: 25 Apr 2000

See all articles by Nickolay V. Moshkin

Nickolay V. Moshkin

Cornerstone Research - New York Office

Ron Shachar

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Date Written: January 2000

Abstract

One of the most significant and robust characteristics of decision making is persistence. An example of this is brand loyalty -- the repeat purchase of new products of the same brand. This paper attempts to show that previous explanations of this phenomenon (switching costs, habit and unobserved heterogeneity) are incomplete, and presents another explanation, namely that individuals possess asymmetric information about their alternatives and are faced with search costs. This explanation can be distinguished empirically from the previous ones using standard panel data set since it has unique implications. It is important to distinguish between the different explanations, since grouping them together under 'switching costs' leads to seriously misleading empirical and theoretical conclusions. We demonstrate the explanatory power of our approach with an empirical example on television viewing behavior. Furthermore, we find that the welfare loss due to incomplete information (versus complete information) is significant.

JEL Classification: C51, D83, L00

Suggested Citation

Moshkin, Nickolay V. and Shachar, Roni, Switching Costs or Search Costs? (January 2000). The Foerder Institute for Economic Research Working Paper No. 3-2000, Available at SSRN: https://ssrn.com/abstract=219769 or http://dx.doi.org/10.2139/ssrn.219769

Nickolay V. Moshkin

Cornerstone Research - New York Office ( email )

599 Lexington Avenue
New York, NY 10022
United States
212-605-5048 (Phone)
212-759-3045 (Fax)

Roni Shachar (Contact Author)

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

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