Andrew Rhodes, Toulouse School of Economics

"Re-examining the Effects of Switching Costs"

Abstract

Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that even if switching costs reduce prices in the long-run, they may still increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

Contact person: Nick Vikander