NERA European Competition Practice Presents OFT Report on Switching Costs
London, England
25 April 2003
Hosted By: the Office of Fair Trading
Director Dr. Mark Williams discussed a new NERA report at an Office of Fair Trading (OFT) seminar on 25 April 2003. The report, "Switching Costs," was commissioned from NERA by the OFT and consolidates fifteen years of academic research on switching costs. The paper seeks to present the research in an accessible way to the policy, legal, and academic communities, while providing some "signposts" to policy makers on the policy implications of switching costs.
The report shows how, in markets with switching costs, firms tend to adopt "bargain then rip-off pricing," in which prices are driven down for those not already locked in by switching costs, compensating -- in part or in full -- for the higher prices faced once customers are locked in. Firms trade off the incentive to "harvest" locked-in customers, or "sow" market share that will provide future harvesting possibilities.
In the presentation, Dr. Williams also showed "switching costs in practice," giving examples from real-world competition cases such as the 1995 Monopolies and Mergers Commission report on video games and the 2001 Competition Commission report on the proposed Abbey National/Lloyds TSB merger, to demonstrate how switching costs can make a difference in practice.
"Switching costs are not a theoretical curiosity," said Dr. Williams. "The academic literature on switching costs is one of those areas of economics which generates fundamental and radical insights into our understanding of markets, and appropriate competition policy and merger control."
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