Collusion Via Switching Costs: How "Frequent -Flyer" Programs, Trading Stamps, and Technology Choices Aid Collusion

1984| Working Paper No. 786

Competing brands that are ex ante homogeneous may become, after the purchase of one of them, ex post heterogeneous. The switching costs that differentiate these functionally identical products may be learning costs, transaction costs, or “artificial” costs imposed by firms, such as repeat purchase discounts. The non-cooperative equilibrium in a market with switching costs may be the same as the collusive outcome in an otherwise identical market with no switching costs. Switching costs also facilitate strictly collusive behavior, by making “chiseling” unprofitable. However, the prospect of future collusive profits leads to vigorous competition for market share in the early stages of a market’s development. The model thus provides an explanation for the emphasis placed on market share as a goal of corporate strategy.