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Let's lock them in: Collusion under consumer switching costs

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  • Fourberg, Niklas

Abstract

Consumer switching costs reduce the price elasticity of existing customers while increasing competition for new ones, creating an “invest-and-harvest” incentive for firms. This paper examines the effect of this dual pricing incentive on firm behavior in a laboratory experiment both with and without switching costs and the ability to communicate. I find that switching costs reduce the price level for new consumers, while the price level for existing consumers is unaffected and the “harvesting” effect is comparatively muted. Markets with switching costs are more competitive and less tacitly collusive. Moreover, switching costs provide a focal point for price setting in the form of a minimum marginal cost mark-up, which is frequently chosen in tacit market sharing outcomes. The results have implications for antitrust policy.

Suggested Citation

  • Fourberg, Niklas, 2023. "Let's lock them in: Collusion under consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:indorg:v:91:y:2023:i:c:s0167718723000875
    DOI: 10.1016/j.ijindorg.2023.103018
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    More about this item

    Keywords

    Switching costs; Cartels; Collusion; Experiments;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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