Switching Costs or Search Costs?
The Foerder Institute for Economic Research Working Paper No. 3-2000
42 Pages Posted: 25 Apr 2000
Date Written: January 2000
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: Suggested Citation