Wednesday, September 20, 2017

Duopolistic competition in markets where consumers have switching costs

Guillem Roig examines Duopolistic competition in markets where consumers have switching costs.

ABSTRACT: In a dynamic competition model where firms initially share half of the market and consumers have switching costs, consumers' sophistication, lifespan and concentration impact the possibility to set collusive prices. I first show that with strategic long-run consumers, collusion is harder to implement than when consumers are not strategic: with sophisticated consumers, a deviating fi rm can cash-in the rents that a buyer obtains after switching. I then study the consequences of relaxing buyers concentration and show that collusion is then easier to maintain than with non-strategic consumers: with strategic consumers a firm must offer a low price at the moment of deviation as consumers can bene t from increased competition, emerging from an asymmetric market structure, without having to pay switching costs. The paper suggests simple policy recommendations: it does not suffice to educate consumers about the competitive effects of their current purchasing decisions, but central purchasing agencies also need to be promoted.

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