Wednesday, March 4, 2009
Posted by D. Daniel Sokol
Chris Wilson, Department of Economics, Loughborough University, presents Market Frictions: A Unified Model of Search and Switching Costs.
ABSTRACT: Despite the existence of two vast literatures, very little is known about the potential di¤erences or interactions between search and switch- ing costs. This paper demonstrates the bene ts of examining the two frictions in unison. First, the paper shows how subtle distinctions between the two costs can provide important di¤erences in their e¤ects upon consumer behaviour and market prices. In many cases, policy makers may prefer to reduce search costs rather than switching costs. Second, the paper illustrates a simple methodology for estimating the magnitude of both costs while demonstrating the potential bias that can arise from a single-cost approach.