ON THE VALUE OF A LARGE CUSTOMER BASE IN MARKETS WITH SWITCHING COSTS

It is usually acknowledged that firms benefit from a large customer base in markets with switching costs. However, Klemperer [1995] argues that this may not be true if an increase in the size of a firm's customer base induces fierce price competition, making the firm worse off. This paper shows...

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Bibliographic Details
Published inThe Journal of industrial economics Vol. 58; no. 3; pp. 627 - 641
Main Author Schmidt, Robert C.
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing Ltd 01.09.2010
Blackwell Publishing
Subjects
Competition
Consumer economics
Consumer equilibrium
Consumer prices
Cost reduction
Customer bases
Customers
Economic costs
Economic models
Enterprises
Equilibrium prices
Industrial economics
Market prices
Market share
Market shares
Market theory
Price competition
Pricing policies
Publishing industry
Studies
Switching costs
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Summary:It is usually acknowledged that firms benefit from a large customer base in markets with switching costs. However, Klemperer [1995] argues that this may not be true if an increase in the size of a firm's customer base induces fierce price competition, making the firm worse off. This paper shows that such an outcome can be obtained under standard assumptions, such as homogeneous goods and uniformly distributed switching costs. In the model, firms have very limited incentives to fight for market shares, and the notion that switching costs make markets less competitive is stronger than previously shown.
Bibliography:istex:D022C799C30A0364DBD892770D0A705FC8A5098F
ark:/67375/WNG-W1F1LFX0-0
ArticleID:JOIE427
This paper is based on a chapter of my Ph.D. thesis. I have benefitted from various discussions with Ulrich Kamecke. I would also like to thank Roland Strausz, Helmut Bester and the participants of the Microeconomic seminars at the Humboldt University and the Free University Berlin. I am especially grateful to an anonymous referee for various comments that I found very useful. The project was partially funded by the German Science Foundation (DFG).
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robert.schmidt.1@staff.hu‐berlin.de
Author's affiliation: Humboldt University Berlin, Department of Economics, Spandauer Str. 1, 10178, Berlin, Germany.
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ISSN:0022-1821
1467-6451
DOI:10.1111/j.1467-6451.2010.00427.x