Dynamic Price Competition with Switching Costs Articles uri icon

publication date

  • December 2015

start page

  • 540

end page

  • 567

issue

  • 4

volume

  • 5

international standard serial number (ISSN)

  • 2153-0785

electronic international standard serial number (EISSN)

  • 2153-0793

abstract

  • We characterize a relatively simple Markov Perfect equilibrium in a continuous-time dynamic model of competition with switching costs. When firms cannot price-discriminate between old and new consumers, the effect of switching costs on prices critically depends on the degree of market share asymmetries: If firms' market shares are sufficiently asymmetric, an increase in switching costs leads to higher prices. However, as market shares become sufficiently symmetric, price competition turns fiercer, and in the long-run, switching costs have a pro-competitive effect. If firms can price-discriminate, an increase in switching costs make all consumers better off regardless of market structure.

keywords

  • switching costs; continuous-time model; markov perfect equilibrium; differential games; market concentration; price discrimination; experience goods; markets