Capabilities, Competition and Innovation Seminars
Paul Heidhues (Dusseldorf Institute for Competition Economics), joint with Botond Koszegi and Takeshi Murooka
Thursday 03 December 2020 14:15 - 15:30
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About this event
We develop models of markets with procrastinating consumers when competition operates - or is supposed to operate - both through the initial selection of providers and through the possibility of switching providers. Paralleling the logic of other work, consumers often fail to switch to better options after signing up with a firm, generating soft competition and high prices at that stage. Unlike in other work, however, in our settings competition is soft or non-existent at the initial stage as well. Because a procrastinating consumer expects to engage in optimal switching behavior in the future, finding the best initial offer is not so important to her, so she does not create competitive pressure. Worse, a competition paradox results: an increase in the number of firms increases the frequency with which a consumer receives switching offers, so it makes procrastination worse and thereby potentially lowers competition and increases prices. By implication, entry can be self-reinforcing, so continuous changes in the environment can generate discontinuous jumps in the number of firms. Sign-up deals, which in existing theories provide a vehicle for returning ex-post profits to consumers, do not help, and if anything worsen, outcomes. And when a consumer does switch away from the initial firm, she might switch to an offer that is as unfavorable as her previous one.
This series is part of the CEP's Growth programme.