The value of switching costs

Posted by D. Daniel Sokol

Gary Biglaiser University of North Carolina, Chapel Hill, Jacques Cemer Toulouse School of Economics (GREMAQ, CNRS and IDEI), and Gergely Dobos Gazdasgi Versenyhivatal (GVH) explain The value of switching costs.

ABSTRACT: We study the consequences of heterogeneity of switching costs in a dynamic model with free entry and an incumbent monopolist. We identify the equilibrium strategies of the incumbent and of the entrants and show that the strategic interactions are more complex and more interesting than either in static models or in models where all consumers have the same switching costs. In particular, we prove that even low switching cost customers have value for the incumbent: when there are more of them its prots increase. Indeed, their presence hinders entrants who nd it more costly to attract high switching cost customers. This leads to dierent comparative statics: for instance, an increase in the switching costs of all consumers can lead to a decrease in the prots of the incumbent.