Value of Switching Costs, The
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ARTICLE SUMMARY
This paper asks how consumers’ costs and choices affect competition.
POLICY RELEVANCE
Competition means that consumers switch between products. Economists have argued that competition will suffer if consumers find it hard to switch. However, the strategic consequences of switching costs are much more complex than the literature assumes when one take into account both the dynamic of the markets and the fact that different consumers have different switching costs.
KEY TAKEAWAYS
- “Switching costs” affect choices when consumers make an investment in something like training or hardware to use a product from one seller, and cannot use an alternative without duplicating the investment.
- In thinking about how switching costs affect competition, economists sometimes assumes consumer have the same switching costs.
- When consumers’ costs differ, consumers and firms make different choices.
- When more consumers have low switching costs, consumers with higher costs pay higher prices.
- If many consumers’ switching costs are low, firms hesitate to enter the market aggressively as they do not want to invest heavily in attracting consumers who might be unfaithful. .
- An existing firm’s profits can fall as the switching costs of all consumers rise.
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About Gary Biglaiser
Gary Biglaiser is a Professor with the Department of Economics at the University of North Carolina – Chapel Hill. He has wide-ranging research interests in applied microeconomic theory with a concentration on industrial organization and regulation. His most recent research is focused on durable goods monopoly (with James Anton), Moonlighting (with Albert Ma) and dynamic oligopoly (with Nikos Vettas).
See more with Gary Biglaiser
About Jacques Crémer
Jacques Crémer is a Toulouse School of Economics (TSE) Research Faculty and Professor of Economics at the Toulouse School of Economics (TSE). He has done fundamental work on planning theory, the theory of auctions and organization theory. Professor Crémer’s current research interests are the theory of organizations, political economy, and networks, software and the internet.
