Citation

Discussion Paper Details

Please find the details for DP8849 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Dynamic Price Competition with Switching Costs

Author(s): Natalia Fabra and Alfredo Garc�a

Publication Date: February 2012

Keyword(s): continuous-time model, firms' asymmetries, Markov-perfect equilibrium and switching costs

Programme Area(s): Industrial Organization

Abstract: We develop a continuous-time dynamic model with switching costs. In a relatively simple Markov Perfect equilibrium, the dominant firm concedes market share by charging higher prices than the smaller firm. In the short-run, switching costs might have two types of anti-competitive effects: first, higher switching costs imply a slower transition to a symmetric market structure and a slower rate of decline for average prices; and second, if firms are sufficiently asymmetric, an increase in switching costs also leads to higher current prices. However, as market structure becomes more symmetric, price competition turns fiercer and in the long-run, switching costs have a pro-competitive effect. From a policy perspective, we conclude that switching costs should only raise concerns in concentrated markets.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8849

Bibliographic Reference

Fabra, N and Garc�a, A. 2012. 'Dynamic Price Competition with Switching Costs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8849