Can Switching Costs Reduce Prices?

Abstract

The existence of switching costs for consumers may aect prices.
While rms have an incentive to increase prices and exploit its current
consumers, they also might reduce prices to increase the number of
consumers next period. This paper presents a model of consumer and
pricing behavior with switching costs to investigate how prices vary with
dierent switching costs levels. I also present a method to estimate
model's parameters. Results show that prices do not monotonically
increase with switching costs. Market shares and prots increase for
small switching cost values and decrease for larger ones.