This paper asks how consumers’ costs and choices affect competition.
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.
- “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.