Discussion Paper Details

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Title: Dynamic Price Competition with Switching Costs

Author(s): Natalia Fabra and Alfredo García

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.

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Bibliographic Reference

Fabra, N and García, A. 2012. 'Dynamic Price Competition with Switching Costs'. London, Centre for Economic Policy Research.