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

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  • *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).

Abstract

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.

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