Estimating Switching Costs and Oligopolistic Behavior

Posted: 3 Mar 1999

See all articles by Moshe Kim

Moshe Kim

University of Haifa - Department of Economics

Doron Kliger

University of Haifa

Bent Vale

Norges Bank (Central bank of Norway)

Abstract

We present an empirical model of firms' strategic behavior in the presence of switching costs. Consumers' transition probabilities embedded in firms strategic interaction are used in a two-stage game to derive structural estimable equations of a first order condition, market-share (demand), and supply equations. The novelty of the model is in its ability to extract information on both the magnitude and significance of switching costs, as well as on consumers' transition probabilities, from conventionally available highly aggregated data which do not contain consumer-specific information. As a matter of illustration, the model is applied to panel data of banks, to estimate the switching costs in the market for bank loans. We find that the point estimate of the average switching cost is 6.6% which is about one half of the market average interest rate on loans, and that over a quarter of the customer's added value is attributed to the lock-in phenomenon generated by this switching cost. More than a third of the average bank's market share is due to its established bank-borrower relationship. The duration of bank-customer relationship implied by the model estimates averages 14 years. The presented technique may be applicable to modelling a wide class of problems where only aggregate data exist.

JEL Classification: L13, G21

Suggested Citation

Kim, Moshe and Kliger, Doron and Vale, Bent, Estimating Switching Costs and Oligopolistic Behavior. Available at SSRN: https://ssrn.com/abstract=148393

Moshe Kim

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel
(972) 4 8240115 (Phone)
(972)4-8240059 (Fax)

Doron Kliger (Contact Author)

University of Haifa ( email )

Haifa 31905
Israel
(972)4-8249587 (Phone)
(972)4-8240059 (Fax)

Bent Vale

Norges Bank (Central bank of Norway) ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 66 74 (Phone)
+47 22 42 40 62 (Fax)

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