DP436 | Multi-Period Competition with Switching Costs

Publication Date

01/07/1990

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Abstract

We analyse an infinite-period model of duopolistic competition in a market with consumer switching costs, in which in every period new consumers arrive and a fraction of old consumers leaves. We show that prices (and profits) are higher than in a market without switching costs, and that this result does not depend importantly on the specific assumptions of our model. We show that switching costs make the market more attractive to a new entrant, even though an entrant must overcome the disadvantage that a large fraction of the market is already committed to the incumbent's product. We examine the evolution of prices and of firms' market shares, and show how these are affected by differences between firms' costs, interest rates, the rate of turnover of consumers and growth in the size of the market. We also show how to use our model to examine macroeconomic issues.