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A theoretical analysis of endogenous and exogenous switching costs

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  • Mengze Shi

Abstract

This paper studies the relation between endogenous and exogenous switching costs. A firm can determine the size of endogenous switching costs, but not the size of exogenous switching costs. This paper develops a game theoretical model to investigate whether these two types of switching costs complement or substitute each other in a firm’s strategy. Our analysis uncovers a substituting relationship, i.e., the equilibrium size of endogenous switching costs should be higher in markets with lower exogenous switching costs. In the equilibrium, the endogenous switching costs cause profit losses to competing firms; the amount of profit loss decreases with the size of exogenous switching costs. Copyright Springer Science+Business Media New York 2013

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  • Mengze Shi, 2013. "A theoretical analysis of endogenous and exogenous switching costs," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 205-230, June.
    • Handle: RePEc:kap:qmktec:v:11:y:2013:i:2:p:205-230
    DOI: 10.1007/s11129-012-9129-4
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    References listed on IDEAS

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    More about this item

    Keywords

    L11; L13; M3; Switching costs; Price competition; Loyalty rewards;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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