Market structure and the competitive effects of switching costs

- We analyze a continuous-time dynamic model of competition with switching costs.
- In the short-run, switching costs are pro-competitive under weak market dominance.
- However, under strong market dominance, switching costs are anti-competitive.
- In the long-run, switching costs are unambiguously pro-competitive.

We revisit the effects of switching costs on dynamic competition. We consider stationary Markovian strategies, with market shares being the state variable, and characterize a relatively simple Markov Perfect pricing equilibrium at which there is switching by some consumers at all times. For the case of low switching costs and infinitely lived consumers, we show that switching costs are pro-competitive in the long-run (steady state) while the overall effect in the short-run (transient state) depends on market structure. In particular, switching costs are anti-competitive in relatively concentrated markets, and pro-competitive otherwise.