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Dynamic Games and Applications

, Volume 5, Issue 4, pp 540–567 | Cite as

Dynamic Price Competition with Switching Costs

  • Natalia FabraEmail author
  • Alfredo García
Article

Abstract

We characterize a relatively simple Markov Perfect equilibrium in a continuous-time dynamic model of competition with switching costs. When firms cannot price-discriminate between old and new consumers, the effect of switching costs on prices critically depends on the degree of market share asymmetries: If firms’ market shares are sufficiently asymmetric, an increase in switching costs leads to higher prices. However, as market shares become sufficiently symmetric, price competition turns fiercer, and in the long-run, switching costs have a pro-competitive effect. If firms can price-discriminate, an increase in switching costs make all consumers better off regardless of market structure.

Keywords

Switching costs Continuous-time model Markov Perfect equilibrium Differential games Market concentration Price discrimination 

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Universidad Carlos III de MadridMadridSpain
  2. 2.University of VirginiaCharlottesvilleUSA

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