The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Switching Costs

  • Paul Klemperer
Reference work entry


Switching costs arise when transactions, learning, or pecuniary costs are incurred by a user who changes suppliers (including for ‘follow-on’ or ‘aftermarket’ products such as refills and repairs). The ex post market power that switching costs give suppliers need not create inefficiencies, and early ‘bargain’ prices can compensate consumers for later ‘rip-off’ pricing. More often, however, switching costs make new entry hard, distort firms’ product ranges, raise firms’ profits and lower consumer and social welfare. Similar issues arise in ‘shopping-cost’ markets. Policymakers should scrutinize markets where firms deliberately choose incompatibility.


Aftermarkets Antitrust cases Compatibility Competition policy Consumer protection Credit card industry Demand inertia Entry Experience goods Follow-on products IBM Incompatibility Learning costs Lock-in Loss leaders Market power Market share Microsoft Network effects Oligopoly Penetration pricing Price wars Product variety Search costs Shopping costs State dependence Switching costs Transaction costs 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Paul Klemperer
    • 1
  1. 1.