Competition dynamics with switching costs

British Gas (1997-2007)

Summary : Theoretical models with switching costs demonstrated that, in a dynamic game, firms have incentives to adopt two-period strategies. Firms “invest” in markets at an early stage in their development to be able to “harvest” in later stage when consumers are locked-in to the supplier they previously patronized. This article shows that these “invest then harvest” strategic behaviours may run into difficulties if consumers are not locked-in in the second competitive stage. The supply of electricity in Great-Britain is taken as a case study of a two-period competition with switching costs. Consumers are not locked-in in second period (at least for the market leader, British Gas) because they benefit from learning effects which reduce the switching costs they bear. Taken into consideration these learning effects could enrich our understanding of the impact of switching costs on competition.

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