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Discussion Paper Details

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Title: Competition When Consumers Have Switching Costs: An Overview

Author(s): Paul Klemperer

Publication Date: July 1992

Keyword(s): Brand Loyalty, Lock-In and Switching Costs

Programme Area(s): Applied Macroeconomics

Abstract: This paper surveys recent work on competition in markets in which consumers face costs to switching between competing firms' products, even when all firms' products are functionally identical. I address issues in macroeconomics, international trade and industrial organization: In a market with switching costs (or `brand loyalty'), a firm's current market share is an important determinant of its future profitability. I examine how the firm's choice between setting a low price to capture market share, and setting a high price to harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry, interest rates, exchange rate expectations, the state of the business cycle, etc. I also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

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Bibliographic Reference

Klemperer, P. 1992. 'Competition When Consumers Have Switching Costs: An Overview'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=704