Switching Costs, Firm Size, and Market Structure

Loertscher, Simon; Schneider, Yves (November 2005). Switching Costs, Firm Size, and Market Structure (Discussion Papers 05-15). Bern: Department of Economics

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In many markets homogenous goods are sold both by large global firms (”chain stores”) and small local firms. Surprisingly, chain stores often charge higher prices. Examples include hotels, airlines, and coffee shops. We provide a simple model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and change locations with a given probability. Consequently, chain stores insure consumers against switching costs. In equilibrium, chain stores charge higher prices, yet attract more consumers. Profits of local stores and chain stores increase with consumer
mobility, but the latter do so faster.

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