Market frictions: A unified model of search costs and switching costs

It is well known that search costs and switching costs can create market power by constraining the ability of consumers to change suppliers. While previous research has examined each cost in isolation, this paper demonstrates the benefits of examining the two types of friction in unison. The paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour, competition and welfare. In addition, the paper also illustrates a simple empirical methodology for estimating separate measures of both costs, while demonstrating a potential bias that can arise if only one cost is considered.

► We show the benefits of studying search costs and switching costs in unison. ► The two costs have different effects on competition and welfare. ► In most cases, search costs are the more anti-competitive and welfare damaging. ► We also offer a methodology to estimate separate measures of the two costs.