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On The Value Of A Large Customer Base In Markets With Switching Costs

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  • Robert C. Schmidt

Abstract

It is usually acknowledged that firms benefit from a large customer base in markets with switching costs. However, Klemperer [1995] argues that this may not be true if an increase in the size of a firm's customer base induces fierce price competition, making the firm worse off. This paper shows that such an outcome can be obtained under standard assumptions, such as homogeneous goods and uniformly distributed switching costs. In the model, firms have very limited incentives to fight for market shares, and the notion that switching costs make markets less competitive is stronger than previously shown.

Suggested Citation

  • Robert C. Schmidt, 2010. "On The Value Of A Large Customer Base In Markets With Switching Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 627-641, September.
    • Handle: RePEc:bla:jindec:v:58:y:2010:i:3:p:627-641
    DOI: 10.1111/j.1467-6451.2010.00427.x
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    References listed on IDEAS

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    1. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    2. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    3. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
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    Cited by:

    1. Robert Schmidt, 2013. "Price competition and innovation in markets with brand loyalty," Journal of Economics, Springer, vol. 109(2), pages 147-173, June.
    2. Drouard, Joeffrey, 2022. "Content-distribution strategies in markets with locked-in customers," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    3. J.-P. Niinimäki, 2023. "Experience Goods, Umbrella Branding, and Reputation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(1), pages 33-44, February.
    4. Rizkiah, Siti K. & Disli, Mustafa & Salim, Kinan & Razak, Lutfi A., 2021. "Switching costs and bank competition: Evidence from dual banking economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

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