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Competition When Consumers Have Switching Costs: An Overview
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.
... Gertler, Hubbard y Kashyap (1991), muestran que un aumento en la tasa de interés libre de riesgo puede tener un impacto inverso en el valor del capital de la compañía. Por otro lado, Klemperer (1995) en su estudio enfatiza en la idea de que la adopción de precios más altos o bajos por parte de las empresas depende de la tasa de interés, que está explicada por las expectativas que tienen estas respecto a sus consumidores, la volatilidad de los precios que adopten las empresas tendrá un impacto en el precio de las acciones; por consiguiente, existe un impacto directo en el valor de la compañía. ...
... Respecto al tipo de cambio, se ha considerado que este genera un impacto en los costos de producción de la empresa, Klemperer (1995) explica que los precios que las empresas establecen para los productos o servicios no solo dependen de las tasas de interés, sino también de las expectativas del tipo de cambio. Kandir (2008) verifica posibles variables macroeconómicas que afectan el rendimiento de las acciones, encontrando interferencia de las tasas de interés, así como los tipos de cambio en el rendimiento de las acciones, mientras que la producción industrial y el precio del petróleo no presentaron ninguna relación significativa. ...
... Gertler, Hubbard y Kashyap (1991) muestran que un aumento en la tasa de interés libre de riesgo puede tener un impacto inverso en el valor del capital de la compañía. Por otro lado, Klemperer (1995) en su estudio enfatiza en la idea de que la adopción de precios más altos o bajos por parte de las empresas depende de la tasa de interés, que está explicada por las expectativas que tienen estas respecto a sus consumidores, la volatilidad de los precios que adopten las empresas tendrá un impacto en el precio de las acciones; por consiguiente, existe un impacto directo en el valor de la compañía. ...
The central idea of this paper is to examine the impact of the main macroeconomic and tax structure parameters on the market value of the firms, which in turn reflects investment decisions, we picked a group of private Mexican corporations that are listed on the Mexican stock exchange is proposed. These companies, which belong to the Price and Quotation Index (PQI) of the Mexican Stock Exchange. The main result of this research is that the exchange rate, gross domestic product, gross external debt, interest rate, and inflation, as well as their lags, have short and long-term effects on the market capitalization, while the tax structure has no long-term effects.
... Gertler, Hubbard y Kashyap (1991), muestran que un aumento en la tasa de interés libre de riesgo puede tener un impacto inverso en el valor del capital de la compañía. Por otro lado, Klemperer (1995) en su estudio enfatiza en la idea de que la adopción de precios más altos o bajos por parte de las empresas depende de la tasa de interés, que está explicada por las expectativas que tienen estas respecto a sus consumidores, la volatilidad de los precios que adopten las empresas tendrá un impacto en el precio de las acciones; por consiguiente, existe un impacto directo en el valor de la compañía. ...
... Respecto al tipo de cambio, se ha considerado que este genera un impacto en los costos de producción de la empresa, Klemperer (1995) explica que los precios que las empresas establecen para los productos o servicios no solo dependen de las tasas de interés, sino también de las expectativas del tipo de cambio. Kandir (2008) verifica posibles variables macroeconómicas que afectan el rendimiento de las acciones, encontrando interferencia de las tasas de interés, así como los tipos de cambio en el rendimiento de las acciones, mientras que la producción industrial y el precio del petróleo no presentaron ninguna relación significativa. ...
... Gertler, Hubbard y Kashyap (1991) muestran que un aumento en la tasa de interés libre de riesgo puede tener un impacto inverso en el valor del capital de la compañía. Por otro lado, Klemperer (1995) en su estudio enfatiza en la idea de que la adopción de precios más altos o bajos por parte de las empresas depende de la tasa de interés, que está explicada por las expectativas que tienen estas respecto a sus consumidores, la volatilidad de los precios que adopten las empresas tendrá un impacto en el precio de las acciones; por consiguiente, existe un impacto directo en el valor de la compañía. ...
... To articulate this intuition more formally and help motivate our empirical analysis, we now introduce a simple framework that allows switching costs to influence borrower welfare. Our framework follows in the spirit of the models in Klemperer (1995) and Kim, Kliger, and Vale (2003). Index a borrower by j and denote borrower j's incumbent bank by I, and a rival (competing) bank by R. The incumbent bank will be involved in a merger, either as the acquiring or target bank, not involving the rival. ...
... We believe that this assumption is realistic. Switching costs can depend on psychological factors, such as loyalty to a certain brand name (Klemperer (1995)) and the ability to adapt to a new environment (Nilssen (1992)), which could be difficult for a bank to infer. Moreover, private information about borrower quality need not be fully revealed through the borrower's relationship with the incumbent bank. ...
... The U.S. Department of Justice (1992) cites switching costs as one of the most important factors to consider when judging the impact of horizontal mergers on competition (section 1.11). For an overview of switching costs and their impact on competition, seeKlemperer (1995). ...
We estimate the impact of bank merger announcements on borrowersâ stock prices for publicly traded Norwegian firms. In addition, we analyze how bank mergers influence borrower relationship termination behavior and relate the propensity to terminate to borrower abnormal returns. We obtain four main results. First, on average borrowers lose about 1 percent in equity value when their bank is announced as a merger target. Small borrowers of target banks are especially hurt in mergers between two large banks, where they lose an average of about 3 percent. Small target borrowers are not harmed, and appear to even gain, from mergers between small banks. Second, bank mergers lead to higher relationship exit rates for three years after a bank merger, and small bank mergers lead to larger increases in exit rates than large mergers. Third, target borrower abnormal returns are positively related to pre-merger exit rates, indicating that firms that find it easier to switch banks are less harmed when their bank merges. Fourth, we find weak evidence that target borrowers with large merger-induced increases in exit rates are more negatively affected by bank merger announcements, suggesting that target borrowers can be forced out of relationships and suffer welfare losses as a result of bank mergers.
... Further, Klemperer (1995) classifies investments into physical, as those undertaken in equipment or for the development of the relationship, informational, referring to how to use a product or its characteristics, and artificially-created or physiological. 128 We consider that this classification highlights the importance that "learning" plays when getting to a particular relationship derived from the interaction between the parties. ...
... Companies are interdependent units and their existence is based on the continuous interaction with other entities and individuals, creating complex networks integrating other organisations, employees, shareholders, customers and the community. Interaction between parties is based on the recognition that 126 Klemperer (1995) 127 Jackson (1985) 128 Klemperer (1995) 129 Gummesson (1995) mutual interdependence and mutual share of resources can derive into more effective business outcomes. Thus, organisational interaction will allow partners to make better use of their capabilities and expertise. ...
... Companies are interdependent units and their existence is based on the continuous interaction with other entities and individuals, creating complex networks integrating other organisations, employees, shareholders, customers and the community. Interaction between parties is based on the recognition that 126 Klemperer (1995) 127 Jackson (1985) 128 Klemperer (1995) 129 Gummesson (1995) mutual interdependence and mutual share of resources can derive into more effective business outcomes. Thus, organisational interaction will allow partners to make better use of their capabilities and expertise. ...
... And, also in these markets, the seller faces, in every period, a trade-o¤ between increasing his future costumer base (by charging a low price) and exploiting his existing base (by charging a high price). Unlike in my paper, the literature on switching costs analyzes this trade-o¤ under the assumption that sellers cannot commit to future prices (see Klemperer (1987Klemperer ( , 1995 or Beggs and Klemperer (1992)). Moreover, this literature has not analyzed the dynamics of prices when sellers have private information about their production costs. ...
... Consider the …rst-stage problem in (11). For V < Z, the objective function (1 whenever U U i and is strictly decreasing and quasi-concave otherwise. ...
... Next, consider the second-stage problem in (11). As proved in Lemma 2, the choice set can be restricted to the continuation values (U 0 ; U 0 h ) that are greater than the pro…t-maximizing values (U`; U h ). ...
This paper studies price dynamics in a product markets characterized by: (a) search frictions— in the sense that it takes time for a buyer to …nd a seller that produces a version of the good he likes; (b) anonymity — in the sense that sellers cannot price discriminate between …rst-time buyers and returning costumers; (c) asymmetric infor-mation— in the sense that sellers are subject to idiosyncratic shocks to their marginal cost of production and privately observe the shocks' realizations. I …nd that the joint dynamics of costs and prices may be very di¤erent than in a standard Walrasian mar-ket. When shocks are i.i.d., the price remains constant in the face of uctuations in a seller's marginal cost. When shocks are moderately persistent, the price adjusts slowly and imperfectly in response to changes in a seller's cost. Finally, when shocks are su¢ -ciently persistent, the price adjusts instantaneously and e¢ ciently as soon as a seller's production cost varies.
... Disse -1 -temaene belyses med relevante modeller som kan knyttes opp til temaene. I delen om byttekostnader ser jeg naermere på noen av Klemperer ( ,1995Klemperer ( ,2007 sine utledninger og modeller. Når det kommer til bundling har jeg tatt utgangspunkt i forskjellige eksempler som kan beskrive bundling på et generelt grunnlag og et eget eksempel fra Pierce & Winter (1996) knyttet direkte til bankbundling. ...
... Teorien om byttekostnader er først og fremst hentet fra Motta (2004) og Klemperer ( , 1995Klemperer ( og 2007. ...
... Klemperer (1987a) nevner tre forskjellige typer byttekostnader som består av transaksjonskostnader, laerekostnader samt kunstige og kontraktuelle kostnader. I en senere artikkel (Klemperer, 1995) gir han en mer konkret oversikt over de forskjellige typene byttekostnader. Disse vil jeg gå mer i detalj om hva innebaerer. ...
... Competition with incompatible network effects is closely related to other forms of competition when market share is important, especially competition when consumers have switching costs (see, e.g., Klemperer (1995), Farrell and Klemperer (forthcoming), and the companion-piece to this article, Klemperer (forthcoming)), and has similar broader implications (e.g., for international trade, see Froot and Klemperer (1989)). Because competition " for the market " differs greatly from conventional competition " in the market " , and especially because capturing consumers' and complementors' expectations can be so profitable, competition policy needs to be vigilant against predatory or exclusionary tactics by advantaged firms, including deliberately creating incompatibility by misusing intellectual property protection. ...
... The fat-cat effect means large shares tend to shrink and small shares to grow; when firms' shares are similar, they return to stable steady state after any shock. More generally, the tradeoff between harvesting old customers and investing in new ones depends on interest rates, the state of the business cycle, expectations about exchangerates , etc, with implications for macroeconomics and international trade (Chevalier and Scharfstein (1996), Froot and Klemperer (1989), Klemperer (1995)). ...
... Nevertheless the empirical literature does suggest that switching costs play an important role in many industries including credit cards, cigarettes, supermarkets, air travel, phone services, electricity suppliers, bookstores, and automobile insurance – see Farrell and Klemperer (forthcoming) for references, and Klemperer (1995) for more examples of markets with switching costs; as technology continues to develop, products become more complex, and services become more important, the importance of switching costs seems likely to increase further. ...
We briefly survey the economics of network effects and switching costs (in 3,400 words). For comprehensive coverage of the same ground see Farrell and Klemperer's 60,000-word contemporaneous survey, available at www.paulklemperer.org.
... Competition with incompatible network effects is closely related to other forms of competition when market share is important, especially competition when consumers have switching costs (see, e.g., Klemperer (1995), Farrell and Klemperer (forthcoming), and the companion-piece to this article, Klemperer (forthcoming)), and has similar broader implications (e.g., for international trade, see Froot and Klemperer (1989)). Because competition " for the market " differs greatly from conventional competition " in the market " , and especially because capturing consumers' and complementors' expectations can be so profitable, competition policy needs to be vigilant against predatory or exclusionary tactics by advantaged firms, including deliberately creating incompatibility by misusing intellectual property protection. ...
... The fat-cat effect means large shares tend to shrink and small shares to grow; when firms' shares are similar, they return to stable steady state after any shock. More generally, the tradeoff between harvesting old customers and investing in new ones depends on interest rates, the state of the business cycle, expectations about exchangerates , etc, with implications for macroeconomics and international trade (Chevalier and Scharfstein (1996), Froot and Klemperer (1989), Klemperer (1995)). ...
... Nevertheless the empirical literature does suggest that switching costs play an important role in many industries including credit cards, cigarettes, supermarkets, air travel, phone services, electricity suppliers, bookstores, and automobile insurance – see Farrell and Klemperer (forthcoming) for references, and Klemperer (1995) for more examples of markets with switching costs; as technology continues to develop, products become more complex, and services become more important, the importance of switching costs seems likely to increase further. ...
We briefly survey the economics of network effects and switching costs (in 3,400 words). For comprehensive coverage of the same ground see Farrell and Klemperer's 60,000-word contemporaneous survey, available at www.paulklemperer.org.
... The existing studies usually model demand for rail transportation as a function of major mode choice determinants such as price, travel time, frequency and certain quality indicators. Our study contributes to the literature on the demand for passenger rail services by empirically identifying switching costs (Klemperer 1995) and a status quo bias (Samuelson and Zeckhauser 1995) in passengers' choices among different intramodal service operators. Switching costs have, for example, been studied for airlines, credit cards, cigarettes, supermarkets, phone and electricity services (see Klemperer 2007: 1981 for an overview) but have not been researched for the passenger rail market, yet. ...
... The impact of switching costs on competition has largely been discussed for other industries, for example, by Farrell and Klemperer (2007) and by Klemperer (1995). Seabright et al. (2003: 60) point out for the passenger rail sector, that "switching costs (natural or strategic) should be a strong limitation to competition". ...
... Switching costs are defined by Klemperer (1995) as costs that a consumer incurs from switching to a competitor's product even when the products of the two firms are functionally equal. ...
The current level of competition in European commercial passenger rail markets is low and empirical data on customer preferences in intramodal competition has hardly been available, yet. Our study raises the knowledge of competition in commercial passenger rail by exploring the determinants of customers’ choice behaviour on two cross-border routes, Cologne-Brussels and Cologne-Amsterdam. We analyse stated preference information from about 700 on-train interviews by means of multinomial Logit regressions. Our analysis indicates that customers experiencing competition (Cologne-Brussels) show a higher preference for competitive services than customers for whom competition is a purely hypothetical situation (Cologne-Amsterdam). Moreover, travellers show a status quo bias, i.e. a preference for the service provider on whose trains they were interviewed which partly stems from switching costs. These findings regarding status quo bias and switching costs complement previous studies on the outcome of intramodal competition, implying that entry is even more difficult than they predicted.
... For one, we believe that the presence of switching costs in routers has influenced their rate of price declines. Klemperer (1995) shows how learning and compatibility costs between existing systems and new purchases can lead to switching costs in changing vendors. Such switching costs can cause buyers to exhibit "brand loyalty" and so increase the likelihood of repeat purchases from incumbent vendors. ...
... When switching costs are present, the seller's optimal strategy is often to set prices low in early periods to capture a large installed base of "locked-in" customers (Klemperer 1995;Farrell and Klemperer 2001). If sellers are unable to identify new and repeat customers, prices in later periods will depend on the fraction of new and repeat buyers. ...
... To examine this, we build a simple extension of the Klemperer (1987Klemperer ( , 1995 model of pricing and spatial competition. Our model predicts that in equilibrium the new entrant should locate closer, but not too close to the weaker incumbents. ...
... A standard finding in the industrial organization literature and a result that emerges in a simple switching cost model (see Appendix I), is that in equilibrium, high cost firms charge higher prices. In their extension of the Klemperer (1987Klemperer ( , 1995 switching cost model, Chevalier and Scharfstein (1996) show that equilibrium prices will also be higher in markets with a higher fraction of high debt firms. High debt firms have a higher probability of exit making future market share less important. ...
... Es sind gravierende Marktmachtprobleme bei digitalen Serviceanbietern ("GAFA" 2 und Co) zu beobachten. Die Kombination von direkten (Farrell und Saloner 1985;Katz und Shapiro 1985) und indirekten (Rochet und Tirole 2003Caillaud und Jullien 2003;Armstrong 2006) Netzwerkeffekten führt zu "Tipping" (Umkippeffekte in Richtung permanenter Dominanz), insbesondere wenn -natürliche oder strategisch geschaffene -Inkompatibilitäten und Wechselkosten hinzukommen (Klemperer 1995). Daten-und Verbundvorteile etablierter Unternehmen eröffnen Spielräume für antikompetitives vertikales und konglomerates Leveraging, da die gesammelten Daten auch für andere Märkte relevant sind (inter alia, Farrell und Katz 2000;Zhu und Liu 2018;De Cornière und Taylor 2019Hagíu et al. 2020). ...
Zusammenfassung
Die 10. Novelle des Gesetzes gegen Wettbewerbsbeschränkungen („GWB-Digitalisierungsgesetz“) soll die deutschen Wettbewerbsregeln so reformieren, dass sie einen geeigneten Ordnungsrahmen für eine zunehmend digitalisierte Wirtschaft darstellen. Im vorliegenden Beitrag diskutieren wir den entsprechenden Referentenentwurf (Januar 2020) aus Sicht der modernen Wirtschaftstheorie. Dabei gehen wir insbesondere auf die Eignung der erheblichen Ausweitung der Missbrauchsaufsicht für einen besseren Wettbewerbsschutz in der Digitalwirtschaft ein. Die Schaffung eines Konzeptes überlegener marktübergreifender Bedeutung (ÜMÜB) sowie die stärkere Betonung relativer Marktmacht und ökonomischer Abhängigkeit sind dabei grundsätzlich zu begrüßen, um moderne Versionen des Behinderungswettbewerbs effektiver bekämpfen zu können. Allerdings fehlen stellenweise Schranken für zu weit gehende Interventionen in den Leistungswettbewerb. Kritisch ist hingegen, dass die Zusammenschlusskontrolle tendenziell geschwächt wird. Wir schlagen vor, im Gegenteil die Ex-Ante-Strukturkontrolle zu stärken, indem das ÜMÜB-Konzept auch in die Zusammenschlusskontrolle integriert wird. Dies würde den gewünschten Ordnungsrahmen für die Digitalwirtschaft verbessern. Schließlich hinterfragen wir die Auswirkungen der geplanten Novellierung auf das europäische System der Wettbewerbspolitiken.
... switching costs, access to distribution channels or advertising) in order to protect expected profits. According to Klemperer (1995), switching costs are transaction costs related to the change of suppliers, with costs of learning how to use new products/services and the uncertainty about the quality of those products/services that have not been tested yet. High switching costs would increase consumer loyalty to incumbents' products and would impose high costs on consumers to change from incumbents to entrants' products, affecting significantly on post-entry expected profits. ...
This paper attempts to assess the variety and relevance of barriers to entry perceived by Portuguese firms. Based on a questionnaire, Portuguese firms’ perceptions were surveyed using a sample of 168 firms. The results suggest that sunk costs, capital requirements, capital costs, and cost disadvantages are the most important barriers to entry. Applying a factor analysis, six underlying dimensions of entry barriers – investment in R&D, strategic behaviour, investment risk, advertising, cost disadvantages, and capacity – were identified. These findings are quite consistent among industries and firms’ sizes. Still, micro firms have lower perceptions regarding entry barriers than SMEs and large firms. Portuguese firms’ perceptions on entry barriers suggest that both structural and strategic barriers are important and that the effectiveness of strategic barriers depends on the structural characteristics of the market.
... Martín, Román and Espino (2011) urged that FFP could be able to operate as a barrier to entry of new competitors, however insufficient research has been conducted to ascertain the impact of this approach on passengers' perceptions with regard to FFP, its possession levels and ultimately in the re-purchase behavior. Klemperer (1995) emphasized the significance of FFP as a passenger retention strategy by showing that passengers find it difficult and expensive while shifting from one airline to another by forgoing the offering of loyalty benefits. However it was vague in the literature regarding the level of complexity experienced by frequent flyers while they possess multiple numbers of FFPs with different airlines of their choice while associated with different FFP statuses. ...
Purpose: This paper tries to find out the effect of single vs. multiple possession and usage of frequent flyer programme by frequent passengers on their re-purchase intention behavior in India.
Design/methodology/approach: This paper tested the hypotheses, whether the variations in possession level of frequent flyer programme influences the relationship among the selected antecedent variables such as passengers’ satisfaction with the loyalty programme, passengers’ level of trust in the airline and the perceived brand image on the re-purchase intention behavior of frequent passengers. A structural equation model depicting the re-purchase behavior of frequent flyers were developed and tested.
Findings: There exists an overall statistical validity of the model build-up by using structural equation modeling. Significant differences are observed in brand and trust variables in influencing re-purchase intention behavior of frequent passengers. This finding was further verified in correspondence to the variations in loyalty programme status and possession levels of loyalty programme memberships.
Practical implications: Re-purchase behavior of passengers holding single and multiple loyalty programme memberships were compared and drawn implications for the airlines to guesstimate re-purchase intentions of regular passengers.
Originality/value: The empirical findings of this study proves that there is a tendency to shift from single to multiple possessions of airline loyalty memberships while the frequent passengers progress on their travel needs. This study proclaimed that passengers possessing single loyalty programme are more influenced by brand image of the airline where as passengers using multiple loyalty programmes are by and large accustomed by means of the trust in the airline services than its brand image.
... There are costs that customers have to bear when they switch from conventional manned ship to autonomous. It may include employee training costs, costs of new equipment, cost and time in the learning required to use new products, the need for technical help, and the transaction costs of switching suppliers (Porter, 1980;Klemperer, 1992). If these switching costs are high, then autonomous ships must offer a major improvement in cost or performance in order for the industries to switch from traditional manned ships (Porter, 1980). ...
This research intends to: clarify the various entry barriers in the merchant shipping market for autonomous ships; investigate the level of importance among these barriers as perceived by maritime executives; and analyse the underlying dimensions between them. To accomplish those objectives, literature review, online survey, and in-depth interviews were done.
... 마케팅 연구에서 전환비용은 주로 소비자의 관점 에서 이루어져왔다( Burnham et al. 2003;Fornell 1992;Jones, Mothersbaugh, and Beatty 2002;Klemperer 1995). 기업과 소비자 관점에서 전환 ...
... Further, many authors comment on the potential security issues related to online and mobile banking, which can deter many people (Lee 2009;Hamlet and Strube 2000). There is also the associated 'switching cost' of learning to use the concept (Wernerfelt 1991;Klemperer 1995). This switching cost can however act beneficially to banks, as a result of the increased customer loyalty it creates when customers avoid having to endure such costs again. ...
This research examines the main drivers behind the adoption of mobile banking, a concept that has revolutionized the day-to-day activities of humans. A review of relevant literature on the topic, leads us toward testing the following key hypotheses: consumers are adopting mobile banking due to the perceived usefulness and benefits associated with the concept; and consumers are adopting mobile banking due to technological advances meaning increased access to the mobile phone devices. We published an online questionnaire on Amazon Mechanical Turk to obtain responses from Internet users. A dominating proportion of participants highlighted how mobile banking is a concept that they adopted between three and 5 years ago, showing just how recently mobile banking took off. The results also showed a number of links between the study’s research hypotheses and the adoption of mobile banking. The overall result of the study shows online banking as a concept that is influenced by a number of both internal and external factors. No single factor plays a dominating force in pushing retail bankers to adopt mobile banking, with it instead being a culmination of numerous different factors. The recent introduction of mobile banking is made seemingly apparent, as is the increasing susceptibility to change in the near future. Subsequently, countless opportunities for further academic research are likely to arise.
... Jones et al., 2007). Sob a ótica gerencial, busca-se um maior entendimento sobre os custos de mudança, pois esses custos, quando percebidos pelos clientes, fornecem às empresas o grau de poder que elas têm sobre a recompra do cliente (Klemperer, 1995). A pesquisa realizada indica quais os custos de mudança que geram efeitos positivos ou negativos. ...
The present study addresses the switching costs in the educational service sector, measuring their effects on the commitment, repurchase intentions and word-of-mouth (positive and negative). This article seeks to fill the gap regarding the analysis of the effects of different types of switching costs: relational, financial and procedural costs, taking into account their multidimensional nature. In order to do that, a literature review and a qualitative research were conducted, followed by a survey with undergraduate students from private institutions to examine the role of switching costs and their positive and negative effects in the context of educational services at undergraduate level. The results show an influence of relational, financial and procedural switching costs on affective, normative and calculative commitment, respectively. The affective commitment and the normative commitment are associated with positive effects, such as repurchase intentions, being affective commitment also associated with positive word-of-mouth. It should be noted that the calculative commitment leads to negative effects: greater negative word-of-mouth and lower repurchase intentions. Hence. the incremental cost of procedural changes, which precede the calculative commitment should not be encouraged. At the end of the article, the results are discussed, as well as the study’s limitations, suggestions for future research and managerial implications are presented.
Key words: switching costs, commitment, repurchase intentions and word-of-mouth, educational services.
... The main objective of FFPs is to improve customer loyalty while providing a more consistent revenue stream for airlines. FFPs are based on the idea that passengers stay loyal if switching airlines involves relatively high cost (Klemperer, 1995). Many airlines have frequent-flyer programs designed to encourage air travelers' enrollment in the program to accumulate points (also called miles, kilometers or segments) which may then be redeemed for air travel or other rewards. ...
... They may be so high that they discourage change, favoring the maintenance of the link to the original brand (Gastal, 2005). In this regard, in repurchase processes, switching costs can be considered as a source of competitive advantage and a power factor of the companies over the consumer (Klemperer, 1995). ...
The main objective of this study is to identify the effect of nostalgic feelings on consumer loyalty to the prevailing
brand following the extinction of a brand in a merger/acquisition process. We also propose an explanatory model
of the relationships between tests of relevant constructs. Based on a review and theoretical reflection on the
constructs under study, this paper outlines a theoretical model in which attitudes in relation to both extinct and
prevailing brands mediate the relationship between nostalgic feelings and customer loyalty, which was
subsequently analyzed by structural equation modeling. The results showed the effect of nostalgic feelings on
customers’ attitudes toward both extinct and prevailing brands and the influence of switching costs on building
brand loyalty. The study contributed to the expansion of the theoretical framework on the subject of marketing by
developing and validating a comprehensive model that adds to existing research, expanding the horizon of the
study of the phenomenon.
... Insofar as our model does not allow for dynamic price competition, it is in some contrast to a part of the switching cost literature. For example, Klemperer (1987Klemperer ( , 1995's major concern is with the dynamic aspects of price competition when consumers are locked in with their supplier due to switching costs, so that sellers are tempted to use 'bargains followed by ripoffs'-pricing schemes (Farrell and Klemperer, 2004). However, our approach is perfectly in line with von Weizsäcker (1984), whom we follow by assuming that firms do not set different prices over time. ...
... The commitment of customers to stay with their current operator was justified by economical reasons which usually put high emphasis on the switching barriers such as money, time and effort [2]. Nonetheless, the traditional theories of utility and expected utility were not always sufficient to explain the tendency of customer to remain with their broadband service provider [3]. ...
Increased competition in broadband telecommunication market led to a surge in campaigns and packages for customers. Whereas traditional economic theory assumed that abundance of alternatives is to be welcomed by customers, recent theories however, have emphasized that multiple choices may have a negative role in adoption or switching behavior. The unorthodox conclusions of negative impact of wide assortment of choices were studied through the lens of behavioral economics. Most notably, " anticipated regret " was identified to be major cause of choice deferral of purchase. This paper investigates the role of selection difficulty and anticipated regret on the intention of broadband subscribers to upgrade to higher connection speed. The result shows that there is a significant positive relationship between anticipated regret and decision avoidance. Results also indicate that selection difficulty has positive relationship with switching cost thus indirectly reducing the perceived net benefit of upgraded internet connection. This study, therefore, confirmed the significant impact of psychological barriers together with economic factors in influencing customers' decisions in the telecommunication sector. This paper thus recommends managers of telecom firms and regulators to seek reducing anticipated regret and selection difficulty when promoting upgraded services even when such services are promising higher economic benefit.
... Plus précisément, l'individu choisira un site Internet concurrent si le coût de son infidélité (appelé aussi coût de changement) est inférieur au gain tiré d'une consommation sur le site concurrent. Selon Klemperer (1995), les switching costs (coûts de changement) résultent du désir pour un consommateur de rendre compatible son achat courant avec un investissement précédent 24 . L'auteur assimile donc l'acte d'achat à un investissement qu'il est coûteux de ne pas renouveler pour les raisons suivantes : existence de compatibilité entre produits, construction d'une relation de confiance entre le client et l'entreprise, coût pour apprendre à utiliser un appareil, incertitude sur la qualité d'une autre marque que le consommateur n'a jamais testé, remises ou autres cadeaux consentis aux clients fidèles, et existence de coûts psychologiques à changer de marque. ...
... Although not framed in the language of competitive strategy, the result that competition for advantage can equalize profits is familiar in the industrial organization literature as well. For example, this can happen in situations where firms choose when to adopt a new technology(Fudenberg and Tirole, 1985) or where firms compete to lock-in customers in the presence of switching costs(Klemperer, 1995).2 In contrast, there has been recent theory building about factor markets(Barney and Makadok, 2001;Makadok, 2001) that explores the drivers of superior performance, particularly asymmetric information, when firms compete to buy resources. ...
A central issue in competitive strategy is the ability of firms to sustain competitive advantages, a topic that is usually treated taking existence of the competitive advantage as given. We endogenize both the existence and sustainability of competitive advantage using a duopoly model in which each firm can develop a resource that improves its competitive position. We as-sume time compression diseconomies where the quicker a firm develops the resource, the higher the development cost. We show that time compression diseconomies naturally give rise to resource heterogeneity and hence compet-itive advantage in that one firm develops the resource faster than the other. We quantify the sustainability of the competitive advantage, derive conditions under which the resource is "inimitable" and show that firm profits are non-monotonic in the extent of time compression diseconomies. We allow firms a choice between developing the resource themselves and imitating the previ-ously developed resource of their rival. Contrary to received wisdom, we show that an innovative firm can increase sustainability and profits by decreasing causal ambiguity.
... For the usual reasons, the two sets of payment rules are revenue equivalent. For more discussion of this result, including its robustness to multi-period contexts, see Bulow and Klemperer (1998); if the total demand of new consumers is more elastic, their economic value will be somewhat less than our model suggests; for a fuller discussion of the e®ects of \brand loyalty" or \switching costs" in oligopoly see, especially, Klemperer (1987a Klemperer ( , 1987b Klemperer ( , 1995) and Beggs and Klemperer (1992). 6 6 If industry executives seem to value the youth segment, it is probably due more to concern for their own future jobs than concern for their shareholders. ...
... Second, if decision-making costs are high, consumers may rely on peers for guidance (Duflo and Saez (2003)), leading to network externalities that can lower price competition and raise barriers to entry (Katz and Shapiro (1994)). In addition, high decisionmaking costs may increase switching costs, leading to sustained, high prices and market power (Klemperer (1995), Farrell and Klemperer (2007), Madrian and Shea (2001), Hortaçsu and Syverson (2004), Beshears et al. (2006), and Carroll et al. (2009)). Finally, behavioral biases may cause consumers to choose funds based on factors that appear to, but do not maximize wealth at retirement, such as past returns in index funds giving strong and perverse incentives to fund managers to compete on perceived returns rather than on fees (Chevalier and Ellison (1997), Choi, Laibson and Madrian (2006)). ...
... The literature has distinguished switching cost models proper and subscription models: in switching cost models, a firm must charge the same price to both current and new consumers, while in subscription models it can offer different prices to consumers with different purchase histories of its products. Switching cost models were introduced in the economics literature by 2 Klemperer (1987b) (see the surveys of the theoretical literature in Klemperer (1995), Annex A of Office of Fair Trading (2003), and Farrell and Klemperer (2007), and the discussion of policy implications in Office of Fair Trading (2003), especially Annex C). Chen (1997) initiated the investigation of subscription models. ...
We study the consequences of heterogeneity of switching costs in a dynamic model with free entry and an incumbent monopolist. We identify the equilibrium strategies of the incumbent and of the entrants and show that the strategic interactions are more complex and more interesting than either in static models or in models where all consumers have the same switching costs. In particular, we prove that even low switching cost customers have value for the incumbent: when there are more of them its profits increase. Indeed, their presence hinders entrants who find it more costly to attract high switching cost customers. This leads to different comparative statics: for instance, an increase in the switching costs of all consumers can lead to a decrease in the profits of the incumbent.
This chapter studies the strategic interaction of firms in the presence of network effects, where the adoption of the same technology or standard by several firms allows each firm to benefit from larger market demand, lower production cost, or both. This can happen even when the technology that firms adopt is inferior to other technologies, such as the Blue-ray disk, often regarded as inferior to high-definition DVDs.
The European Commission has proposed a new regulatory tool to govern of digital markets. The Digital Markets Act (DMA) intents to limit the market behavior of so-called gatekeepers to ensure contestable and fair digital markets. We review the provisions of the DMA both from a legal and from an economic perspective. Notwithstanding a number of benefits, we identify several issues with the current proposal. When looking at the core provisions of the proposal from an economic perspective, a number of of contention arise: many of the provisions seem to be quite narrow in scope and it seems difficult to extrapolate more general rules from them; the economic harm of some of the provisions is both uncertain and in principle debatable; the alleged (self-executing; non self-executing) distinction between different types of obligations cannot be verified; and, in addition, Art. 5–7 DMA seem to contain three distinct regulatory instruments; last but not least, while the DMA seeks to control existing gatekeepers, the “tipping” of markets and the rise of further gatekeepers is not guaranteed by the proposed regulation, this in turn leads to a larger critical analysis of the gatekeeper as the DMA’s norm addressee. While the goals and nature of the DMA have gained in clarity throughout the legislative process, its scope remains somewhat obtuse. On the one hand it seems set on regulating gatekeepers as they exist today, on the other, it also aims to bring about systemic change in the digital single market. How it expects to achieve the latter is not entirely clear. On closer examination, the DMA also contains a complex enforcement regime that not only depends on the compliance of gatekeepers but may also forestall the envisioned speed and efficacy of the instrumment. In this light and by critically looking at the nature of ex ante and ex post measures in broader competition policy, we conclude that a reform of the competition policy regime would better suit the overalls aims of reining in big tech in future.
This article extends the literature on switching costs by considering what happens when retailers and manufacturers are separate entities and some customers are locked in with retailers. This separation introduces a dynamic inconsistency problem as manufacturers face the problem of extracting too much surplus from the retailer in which case the retailer has no incentive to build a subscriber base. It is shown that different trading relationships arise according to the nature and magnitude of switching costs. When switching costs are high, then integrated structures are always predicted (or exclusive dealerships in case vertical integration is banned). Vertical integration should be allowed as it provides high‐powered incentives to acquire market shares.
This chapter studies the strategic interaction of firms in the presence of network effects, where the adoption of the same technology or standard by several firms allows each firm to benefit from larger market demand, lower production cost, or both. This can happen even when the technology that firms adopt is inferior to other technologies, such as the Blue-ray disk, often regarded as inferior to High-Definition DVDs.
I study the ability of two competing firms to set collusive prices in markets where consumers have switching costs. In consumer markets (with a small number of consumers), I find an antifolk result in which collusion, in the presence of switching costs, does not arise with patient firms. Patient firms compete aggressively and consumers expect a large utility. A collusive equilibrium is unstable because a deviating firm incorporates the future consumer utility in its deviating price. Also, consumers have a strategic impact so, with the prospects of large utility, they decide to switch to destabilize the firms' collusive agreement. These results do not eventuate in markets with a large number of consumers. In mass markets (a continuum of consumers), a single consumer lacks a strategic impact to destabilize a collusive agreement and a deviating firm cannot appropriate the consumer utility when deviating from collusion. Collusion, then, becomes straightforward to achieve. We show that for any number of consumers, switching costs make collusion easy to sustain.
This paper develops a model to measure brand loyalty. This is achieved by researching historical brand loyalty models from the literature, and to identify from these models the constructs that influence behaviour related to brand loyalty. An exploratory research perspective examined a broad range of survey-based loyalty influences and then reduced these influences to the twelve more important ones. These twelve influences were further examined and a number of valid questions to measure each influence, were formulated from the literature review. This culminated in the final result, namely the model to measure brand loyalty. The research is of value to management, especially marketing and brand managers, as well as academics and other researchers. Managers will be able to apply the model to determine which specific influences are the most important for their products or services, while also identifying where their brand loyalty fails.
Under recurrent procurement, the awarding of a contract to a firm may put it in an advantageous position in future tenders, which may reduce competition over time. The objective of this paper is to study the dynamics of competition for tendered contracts, focusing on factors that may generate incumbent advantage. Particular attention is given to learning economies, sunk costs of entry and switching costs for the procurer. The paper then applies these insights to analyse empirically the evolution of competition in the market for local bus services in London.
When the Bank set sail on its forward guidance adventure in summer 2013 it might reasonably have expected that by the time the unemployment rate had reached 5½ % the Committee would have begun raising interest rates. However, any plans for lift-off were derailed by a marked deterioration in the inflation outlook during the two years that followed. Oil prices and the currency did what a major financial crisis could not: tip the UK economy into deflation.
Vor nunmehr fast drei Jahrzehnten stellte Nobelpreisträger George Stigler (1968, S. 1) lakonisch fest: „Eine Disziplin namens Industrieökonomik existiert nicht.“ Vielmehr, so Stigler, sei das, was einige für ein eigenständiges Forschungsgebiet der Wirtschaftswissenschaften hielten, lediglich ein Anwendungsbereich der Preistheorie bzw. Mikroökonomik. Daß sich Stigler irrte, ist nicht überraschend, während das Ausmaß seines Irrtums allerdings sehr wohl verblüfft. In einem typischen Jahr erscheinen im American Economic Review genauso viele Artikel, die der Industrieökonomik zuzuordnen sind, wie Artikel aus anderen volkswirtschaftlichen Unterdisziplinen. In den Jahren 1986 und 1987 wurden sogar mehr Artikel aus der Industrieökonomik veröffentlicht als aus jedem anderen Gebiet der Volkswirtschaftslehre. In der Tat stellt die große Zahl an Beiträgen auf dem Feld der Marktdynamik eine Herausforderung an jeden dar, der den Versuch unternimmt, Literatur, Methoden, Hauptthemen, Grundprobleme sowie die Theorien und den empirischen Forschungsstand zusammenzufassen. Denn im letzten Jahrzehnt fand in all diesen Bereichen fast so etwas wie eine Revolution statt, die die Industrieökonomik Mitte der neunziger Jahre zu einer deutlich eingrenzbaren Disziplin machte, allerdings auch zu einem Forschungsgebiet, das im Vergleich zum Stand von vor 10 oder 15 Jahren kaum noch wiederzuerkennen ist.
The objective of this paper is to evaluate the model to measure brand loyalty. This is achieved by
using the model to measure three fast moving consumer goods (toothpaste, bread and coffee) and apply the model to measure the brand loyalty influences and their measuring criteria. If the model remains valid when applied to different FMCG products, and measures brand loyalty of the three products successfully, it implies that the model is a generic rather than specific managerial tool in the FMCG industry. The results obtained from the research in this article shows that the model to measure brand loyalty were successful and remained valid in the case of all three the products. The results are promising, showing that the model to measure brand loyalty strives towards a generic tool that can be applied in the FMCG industry in different products. However, the model needs to be scrutinised further by exposing it to a wide range of FMCG products to ensure that it really is applicable to all FMCG products. Managers will find the model valuable because they can apply the model to determine which specific influences are the most important for their products or services, while also identifying where their brand loyalty fails. This research paper is an exploratory study of brand loyalty in the FMCG market which sets a scientific base for academia who wants to further research the concepts of brand loyalty and brand management. In addition, the model sets a scientific base for academia who wants to further research the concepts of brand loyalty and brand management.
The importance of offsets policies has grown on a regular basis since the procurement phases that occured during the 1970s. Compensation rates frequently superate 100% figures, and sometimes reach 300% with specific transations. The investigation of this phenomenon remains crucial at the moment where the creation of an integrated European Defense Market is at stake. Introducing offsets may be explained by the simulataneous existence of national protectionist regulations and of natural barriers to enter national markets, such as information costs and costs incurred by changes in the supply chain. Both explain limitations to spontaneous trans-national industrial partnerships. This article mobilizes tools in industrial and neo-institutional economics. It aims (1) at understanding the rationales of compensation policies under the light of neo-institutionalist approaches, and (2) at appraising the impact of offsets policies on the European Defense Market integration dynamics. The article also investigates the consequences for barriers and protectionist measures to enforce each other. Improving the European Defense Market will not require only the suppression of protectionist regulations.
We revisit the effects of switching costs on dynamic competition. We consider stationary Markovian strategies, with market shares being the state variable, and characterize a relatively simple Markov Perfect pricing equilibrium at which there is switching by some consumers at all times. For the case of low switching costs and infinitely lived consumers, we show that switching costs are pro-competitive in the long-run (steady state) while the overall effect in the short-run (transient state) depends on market structure. In particular, switching costs are anti-competitive in relatively concentrated markets, and pro-competitive otherwise.
The growth of mobile Internet usage is raising concerns about the sufficiency of capacity in networks. Therefore, several technical solutions are currently being developed and standardized to increase the efficiency in the radio access and on the entire end-to-end Internet path. If successfully deployed,
these technologies will have a significant impact on the Internet connectivity market, especially the mobile access competition. The objective of this paper is to shed light on the different evolution paths of the mobile access market which developments in technical, economic and regulatory domains could induce in the future. This paper envisions operator and end-user centric competition scenarios and compares them against the current vertical competition between mobile network operators (MNOs). The analysis shows that the degree of competition in the mobile access in the future is highly dependent on the level of transaction
and switching costs. The end user scenario with related multipath protocol deployments intensifies the competition more than the operator scenario enabled by software-based dynamic spectrum
management.
This paper examines monopolistic behavior in a framework with dynamic demands. We show that time consistent output and pricing policies yield different equilibrium outcomes in terms of profits and welfare. In a simple two-period model, we find that pricing policies impose less restrictive constraints on a producer of addictive goods, allowing him to attain higher equilibrium profits. In contrast, a durable goods producer is better off implementing output policies. We study the effect of instrument selection on the strategic properties of the monopolist’s intra- personal game. Intertemporal substitutabilities imply that current and future prices are strategic complements, while current and future output levels may be strategic substitutes. Intertemporal complementarities reverse the strategic properties of these instruments.
This study explores determinants of customer choice behaviour in passenger rail competition on two cross-border routes, Cologne–Brussels and Cologne–Amsterdam. It fills a gap in the literature on competition in commercial passenger rail by relying on newly collected stated preference data from about 700 on-train interviews. Our multinomial Logit estimations reveal two important effects that are closely connected to (psychological) switching costs. First, the customers on the route Cologne–Amsterdam, for whom competition is a purely hypothetical situation, value a competitive market structure lower than customers on the already competitive route Cologne–Brussels. Second, travellers show a status quo bias with a preference for the service provider on whose trains they were interviewed. This effect goes beyond the impact exercised by explanatory variables capturing the observable differences of the services and customers, including loyalty-enhancing effects like the possession of customer cards. Our results imply that entry into the commercial passenger rail market may be more difficult than often thought. Thus, the study contributes to explaining the low level of competition in these markets in Europe.
This paper brings new evidence from the privatized social security system in Mexico, offering insight into investment behavior and the efficacy of government “nudges” in the context of profit maximizing firms. We use administrative data from the social security system surrounding the government adoption of a new official fee index aimed at simplifying fees and increasing price sensitivity of investors. The fee index combined load and management fees in a particular way, implying that choosing a lower index firm could lead many workers to choose a higher-cost fund for them. We find that before the index, investors of all backgrounds paid little attention to fees when choosing fund managers. Post-policy intervention, investors heavily weighted the fee index regardless of whether doing so caused them to choose a higher-cost fund. In contrast to investors, we find that firms responded optimally to the changes in demand induced by government policy, restructuring rather than lowering their fees to minimize the index. The strategic response erased gains to consumers from increased price sensitivity and redistributed management fees from high-income to low-income segments of the market. We conclude that regulations and policies aimed at aiding consumer decision-making also need to incorporate firm incentives to be effective.
Firms spend substantial resources on creating and maintaining customer relationships. We explore the role of this customer capital for firm level and aggregate dynamics. Building on the neoclassical adjustment cost model of investment, we propose a tractable search theoretic general equilibrium model of long-term customer relationships. Frictional product markets require firms to spend resources on sales efforts, and cause existing customers to be partially locked-in. Our model implies that in more frictional product markets, where firms selling expenses are higher, measured profit rates, Tobin’s Q and markups are higher. Sales and investment are less volatile and exhibit hump-shaped responses to shocks. As a result, the model also reproduces the well-documented failure of investment-Q regressions. We document that these patterns are present in Compustat data.
I find that—when shocks are sufficiently persistent—prices are fully flexible.
This paper argues that telecommunications markets present the consumer with a decision-making environment that is particularly likely to be prone to established biases in consumer decision-making. The analysis identifies four properties of telecommunications markets, which in combination are probably unique and which may make the sector prey to biases identified by behavioural economics. The analysis offers a range of known behavioural phenomena that, first, may help to explain the generally low levels of switching between telecommunications providers and, second, could result in failure to select optimum contracts, because of inaccurate expectations of usage or time inconsistent preferences. While more research is required to assess the merit of these hypotheses, they raise the possibility that telecommunications markets may be inefficient and prone to less effective competition than many other consumer markets. Potential policy responses are also discussed.
This research investigates how the experience learned in repeated transactions by consumers and manufacturers would affect supply-chain partners' strategic decisions such as price, order quantity and service level. Consumer demand depends on two factors: (1) retailer price and (2) service level provided by the manufacturer in the past and current transaction periods. Game theory is used to understand interactions between the horizontally competitive suppliers and their vertical interactions to the common retailer in the one-period looking-ahead decision environment. Dynamic-system concepts are integrated into the game-theoretic model for understanding the evolution of the strategic decisions over multiple time periods. The research shows that the manufacturer with any type of cost-advantage for providing more services to its customers will capture a larger market than its competitor. Comparison of our model to the myopic model indicates that the myopic suppliers, who ignore the customer learning effect on future periods, shrink their market sizes and earn less profit over time. The manufacturers who use the learning experience to plan future investment can prevent this phenomenon from happening and enhance their competitiveness.
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