Costlier switching strengthens competition even without advertising

TL;DR

This paper models how higher switching costs in markets influence competition, showing that increased switching costs can lead to lower equilibrium prices and intensified competition, even without advertising.

Contribution

It introduces a model demonstrating that higher switching costs can reduce prices and intensify competition, challenging the conventional view that they always hinder competition.

Findings

Higher switching costs can lower equilibrium prices.

Increased switching costs may cause some buyers to exit the market.

Firms may cut prices across a range of parameters.

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.