Switching Costs in Two-Sided Markets

In many markets, there are switching costs and network effects. Yet the literature generally deals with them separately. This paper bridges the gap by analyzing their interaction (or ‘indirect bargain’) in a dynamic two-sided market. It shows that in the symmetric equilibrium, the classic result that the first-period price is U-shaped in switching costs does not emerge, but instead switching costs always intensify the first-period price competition. Moreover, an increase in switching costs on one side decreases the first-period price on the other side. Policies that ignore these effects may overestimate the extent to which switching costs can reduce welfare

Dynamic competition with customer recognition and switching costs: theory and application

This dissertation aims to contribute to our understanding of dynamic interaction in duopoly markets. Chapter 1 motivates the study and offers a brief overview of the results. In Chapter 2 I study the dynamic equilibrium of a market characterized by repeat purchases. Such markets exhibit two common features: customer recognition, which allows firms to price discriminate on the basis of purchase history, and consumer switching costs. Both features have implications for the competitiveness of the market and consumer welfare but are rarely studied together. I employ a dynamic framework to model a market with customer recognition and switching costs. In contrast to earlier studies of dynamic competition with switching costs, these costs are explicitly incorporated in the demand functions. Two sets of market equilibria are characterized depending on the size of the switching cost. For all values of the switching cost, customer recognition gives rise to a bargain-then-ripoff pattern in prices and switching costs amplify the loyalty price premium. When switching costs are low, there is incomplete customer lock-in in steady state, firm profits increase in the magnitude of the switching cost and introductory offers do not fall below cost. When switching costs are high, there is complete customer lock-in in steady state, firm profits are independent of switching costs and introductory prices may fall below cost. Under incomplete lock-in and bilateral poaching, switching costs do not affect the speed of convergence to steady state; under complete customer lock-in and no poaching from either firm, convergence to steady state occurs in just one period. The model also suggests that imperfect customer recognition leads to lower profits relative to both uniform pricing and perfect customer recognition. In Chapter 3 I use the market framework developed in Chapter 2 to examine the perception that imperfect competition hinders information sharing among rivals in games of random matching. In contrast to previous studies of information sharing, I propose a new channel through which competition may deter information sharing. This approach reveals a key role for firm liquidity by showing that information sharing among rivals is more likely to arise in markets populated by more liquid firms. Employing a dynamic duopoly framework, in which competition intensity varies with the degree of product differentiation, consumer switching costs and consumer patience, I show that more intense market competition can weaken the disincentives associated with disclosing information to a rival. I test the model's predictions using firm-level data on the information-sharing practices of agricultural traders in Madagascar. As predicted by the model, traders operating in liquid markets are shown to be more likely to share information about delinquent customers. This result is robust to the use of two alternative measures of liquidity, of which one is credibly exogenous, and two alternative ways of defining market liquidity. Furthermore, traders who report more intense competition in their market are found to be significantly more likely to share information

MIXED PRICING IN OLIGOPOLY WITH CONSUMER SWITCHING COSTS

In this paper we develop a two-period model of duopolistic competition with consumer switching costs. Our model extends previous results in these kind of models in a more natural framework where products are undifferentiated except by switching costs. We also allow for differently informed consumers and a dynamic consumer tumover. In this model the competitiveness of markets with consumer switching costs is determined by the proportion of price sensitive consumers, that is fully informed uncommitted consumers, in the market. In contrast with previous studies, firms have different (asymmetric) market shares in equilibrium. Our model supports the presence of action-reaction in the evolution of markets with consumer switching costs, the possibility of (accidental) price wars, price promotions, and the possible optimality of strategic commitment to a low market share as a way to deter entry in this type of market. JEL nos. 022. 611 Keywords: Market share, mixed strategies, switching costs.

Information and drug prices: evidence from the Medicare discount drug card program

In early 2004, the U.S. Government initiated the Medicare Discount Drug Card Program (MDDCP), which created a market for drug cards that allowed elderly and handicapped subscribers to obtain discounts on their prescription drug purchases. Pharmacy-level prices for many drugs were posted on the program website weekly from May 29, 2004 to December 31, 2005, as the largest undertaking in the history of government-sponsored information release began with the hope of promoting competition by facilitating access to prices. A large panel of pharmacy-level drug price data collected from the Medicare website indicates that there was significant and persistent dispersion in prices across cards throughout the program. Moreover, the time-path of prices was non-monotonic; the prices declined initially when consumers were choosing cards but rose later when subscribers were unable to switch from one card to another. In contrast, contemporaneous control prices from on-line drug retailers, which were unrelated to the program, rose steadily over time, indicating that MDDCP prices evolved in a way different from the general evolution of prices outside the program. In view of the fact that the program rules prevented consumers from changing their cards at will, the evolution of MDDCP prices is consistent with certain models of dynamic price competition with consumer switching costs, such as Klemperer’s (1987a,b). Estimates of potential savings from purchasing at program prices are also provided.Drugs ; Medical care, Cost of

Asymmetric-valued Spectrum Auction and Competition in Wireless Broadband Services

We study bidding and pricing competition between two spiteful mobile network operators (MNOs) with considering their existing spectrum holdings. Given asymmetric-valued spectrum blocks are auctioned off to them via a first-price sealed-bid auction, we investigate the interactions between two spiteful MNOs and users as a three-stage dynamic game and characterize the dynamic game's equilibria. We show an asymmetric pricing structure and different market share between two spiteful MNOs. Perhaps counter-intuitively, our results show that the MNO who acquires the less-valued spectrum block always lowers his service price despite providing double-speed LTE service to users. We also show that the MNO who acquires the high-valued spectrum block, despite charing a higher price, still achieves more market share than the other MNO. We further show that the competition between two MNOs leads to some loss of their revenues. By investigating a cross-over point at which the MNOs' profits are switched, it serves as the benchmark of practical auction designs

A waste of energy? A critical assessment of the investigation of the UK Energy Market by the Competition and Markets Authority

This document is the accepted manuscript version of the following article: Chrysovalantis Amountzias, Hulya Dagdeviren and Tassos Patokos, ‘A waste of energy? A critical assessment of the investigation of the UK energy market by the Competition and Markets Authority’, Competition & Change, Vol. 21 (1): 45-60, February 2017. The final version of this paper is available at doi: http://journals.sagepub.com/doi/pdf/10.1177/1024529416678070. Published by SAGE Publishing.In this paper, we assess the findings of the UK energy market investigation by the Competition and Markets Authority, conducted during June 2014–June 2016.We argue that the results of the investigation have been advantageous for the large energy companies and they risk failing to bring any significant and positive change to the energy industry.We highlight three major aspects of the Competition and Markets Authorities assessment. First, the panel examined retail and wholesale segments of the energy industry in isolation, which can be misleading in the assessment of vertical integration. It also considered new entries to the sector as a sign of competitive strength when many were due to favourable government policies in the form of exemptions from various obligations. Second, its conclusion that a position of unilateral market power by the large energy companies arises from weak customer engagement (i.e. low switching rates) shifts the focus and responsibility for the problems of the energy markets away from the conduct of the companies onto customers. Finally, the investigation placed an overemphasis on competition without due reference to its consequences for consumers’ welfare.Peer reviewe

Harmful Freedom of Choice: Lessons from the Cellphone Market

This article focuses on the relationship between provider and customer, specifically on the complexity of available contracts in the cellphone market and the ways this complexity might be harmful to consumers. This article aims to elucidate the issues, fleshing them out both as a general phenomenon and as a specific implementation in the cellphone context. The aim is not to provide ultimate solutions, but to show the directions these solutions might take and the difficulties involved

Co-ordination and Lock-in: Competition with Switching Costs and Network Effects

Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in effciency, and gives vendors lucrative ex post market power-over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such "competition for the market" or "life-cycle competition" can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct effciency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-effciency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later "tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and s also discourage more aggressive entry. Because of these competitive effects, even ineffcient incompatible competition is often more profitable than compatible competition, especially for dominant rms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.