Switching Beers? The Effects of Switching Costs on Prices and Profits in Competitive Markets

We consider a dynamic oligopoly on the beer market and study the differential effects of switching costs on product prices, market shares, and profits. Our demand estimation results show large differences in brand loyalty, and switching costs across customer income segments and beer brands. Our supply estimation results show that the low-quality firm experiences a higher competitive pressure on price since low-quality consumers are more price sensitive and switch more easily to the high-quality firm’s product than vice versa. The high-quality firm is better shielded from price competition, as its consumers are less likely to switch to the low-quality product.