Promotion of Competition on the Demand Side

Abstract

Much government policy focuses on improving the supply-side conditions of product rivalry, but policymakers rarely address the potential beneficial impacts of improving the demand-side conditions of rivalry. This paper suggests that focus on such demand-side elements can yield substantial benefits to consumers, especially by changing the elasticity of residual demand faced by individual firms. Small changes in switching costs, search costs, or the number of "elastic" consumers can have large beneficial impacts on equilibrium outcomes. A number of practical examples are provided that illustrate how demand-side competition can be enhanced.

Keywords: Competition, switching costs, search costs

JEL Classification: D10, D83, L14