Switching Costs
15 April 2003
By Dr. Mark Williams with former NERA Director Dr. Atilano Jorge Padilla and former NERA Senior Consultant Ciara McSorley
"Switching costs" can be defined as the real or perceived costs that are incurred when changing suppliers but which are not incurred by remaining with the current supplier. Such costs arise in a variety of everyday situations ranging from early redemption penalties when changing mortgage lenders to the uncertainty costs faced with trying an untested brand that may or may not be suitable. Switching costs can significantly influence how markets function.
The authors have completed work on a major study commissioned by the Office of Fair Trading (OFT) and the Department of Trade and Industry that examines switching costs. The study is part of the OFT's Economic Discussion Paper Series.
The main report examines the implications of consumer switching costs in the functioning of markets and explores what the OFT can do to mitigate switching costs. Each of the annexes to this report are also available by clicking on their titles below.
Annex A - Review of the Academic Literature
This annex contains a thorough review of the switching cost literature and is aimed principally at economists.
Annex B - Empirical Methods
This annex presents an assessment of the empirical methods the OFT could use to analyze markets in which switching costs are present. It contains a technical guide to the econometric techniques, including an outline of the underlying econometric models and how the techniques should be applied.
Annex C - Case Studies
This annex contains four case studies which demonstrate how switching costs can be identified and analyzed. The four case studies include: 1) frequent flyer programs; 2) UK retail gas and electricity markets; 3) the mobile phone sector; and 4) medical services.
