Costlier switching strengthens competition even without advertising

Sander Heinsalu

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arXiv · 2104.08934

Costlier switching strengthens competition even without advertising

Sander Heinsalu

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Abstract

Consumers only discover at the first seller which product best fits their needs, then check its price online, then decide on buying. Switching sellers is costly. Equilibrium prices fall in the switching cost, eventually to the monopoly level, despite the exit of lower-value consumers when changing sellers becomes costlier. More expensive switching makes some buyers exit the market, leaving fewer inframarginal buyers to the sellers. Marginal buyers may change in either direction, so for a range of parameters, all firms cut prices.

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Sander Heinsalu. 2021-04-18. Costlier switching strengthens competition even without advertising. https://arxiv.org/abs/2104.08934

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