Dynamic Price Competition with Switching Costs

Natalia Fabra and Alfredo García

Dynamic Games and Applications, 2015, vol. 5, issue 4, 540-567

Abstract: We characterize a relatively simple Markov Perfect equilibrium in a continuous-time dynamic model of competition with switching costs. When firms cannot price-discriminate between old and new consumers, the effect of switching costs on prices critically depends on the degree of market share asymmetries: If firms’ market shares are sufficiently asymmetric, an increase in switching costs leads to higher prices. However, as market shares become sufficiently symmetric, price competition turns fiercer, and in the long-run, switching costs have a pro-competitive effect. If firms can price-discriminate, an increase in switching costs make all consumers better off regardless of market structure. Copyright Springer Science+Business Media New York 2015

Keywords: Switching costs; Continuous-time model; Markov Perfect equilibrium; Differential games; Market concentration; Price discrimination (search for similar items in EconPapers)
Date: 2015
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Working Paper: Dynamic Price Competition with Switching Costs (2012)
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DOI: 10.1007/s13235-015-0157-z

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