The Effect of Consumer Switching Costs on Prices: A Theory and its Application to the Bank Deposit Market

As demonstrated by Klemperer (1987), if households face a cost of switching among brands of a differentiated good, pricing is likely to be more competitive, the greater is the fraction of customers that move into or around the market. I generalize this theory to a world with arbitrary market structure and test it empirically using panel data on bank retail deposit interest rates. I find that the amount of household migration in a market has a significant competitive influence on price markups, that is, a positive effect on the level of deposit interest rates. Consistent with the model, the magnitude of this effect depends in some cases upon the degree of market concentration.     

CONSUMER SWITCHING COSTS AND FIRM PRICING: EVIDENCE FROM BANK PRICING OF DEPOSIT ACCOUNTS*

We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade‐off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in‐migration. Further, because greater out‐migration implies that a locked‐in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out‐migration. Also, because this effect of out‐migration logically depends on the extent of in‐migration, an interaction effect exists. We find evidence strongly supporting these relationships.     

Switching costs in local credit markets

Switching costs are a key determinant of market performance. This paper tests their existence in the corporate loan market in which they are likely to play a central role because of the complexity of contracts and the relevance of informational problems. Using very detailed data at bank-firm level on four Italian local credit markets we empirically show that firms tend to iterate their choice of the main bank over time. This inertia is not related to unobserved and time invariant firms' preferences across banks and can be attributed to the existence of switching costs. Moreover these costs are higher for single-bank firms. We also offer evidence that banks price discriminate between new and old borrowers by charging lower interest rates to the former in order to cover part of the switching costs. The discount amounts to about 44 basis points and is equal to 7% of the average interest rate. These results prove robust to a number of other potential identification drawbacks.     

Pricing with Consumer Switching Costs: Evidence from the Credit Card Market

The credit card market is a natural setting for investigating the relationship between pricing and consumer switching costs. I find, using a detailed panel of credit card issuers, that switching costs are an important influence on pricing for commercial banks. The results are stronger for commercial banks with risky customer bases, suggesting that there is a relationship between default and switching costs. Switching costs appear to have almost no influence on pricing for credit unions, a result that is consistent with their status as not–for–profit entities.     

Are Adjustable‐Rate Mortgage Borrowers Borrowing Constrained?

Past research argues that changes in adjustable‐rate mortgage (ARM) payments may lead households to cut back on consumption. These outcomes are more likely if ARM borrowers are borrowing constrained, and we show in this article that ARM borrowers exhibit attitudes toward borrowing and behavior that are consistent with being borrowing constrained. Although the demographic and financial characteristics of ARM and fixed‐rate mortgage (FRM) borrowers are somewhat similar, ARM borrowers differ from FRM borrowers in their uses of credit and attitudes toward it. In addition, we find the consumption growth of households with an ARM is more sensitive to past income than the consumption growth of other households, suggesting the ARM borrowers may be subject to borrowing constraints that hinder their ability to smooth consumption.     

Switching Costs in Two‐Sided Markets

In many markets, there are switching costs and network effects. Yet the literature generally deals with them separately. This paper bridges the gap by analyzing their interaction (or ‘indirect bargain’) in a dynamic two‐sided market. It shows that in the symmetric equilibrium, the classic result that the first‐period price is U‐shaped in switching costs does not emerge, but instead switching costs always intensify the first‐period price competition. Moreover, an increase in switching costs on one side decreases the first‐period price on the other side. Policies that ignore these effects may overestimate the extent to which switching costs can reduce welfare.     

Switching Costs in Vertically Related Markets

In the presence of switching costs, firms are ofteninterested in expanding current market shares toexploit their customer base in the future. However, ifthe product is sold by retailers, manufacturers mayface the problem of extracting too much surplus fromthe retailer. If this happens, then the latter has notan incentive to build a subscriber base. This paperwould like to connect two streams in the literature,on switching costs and vertical restraintsrespectively. An upstream–downstream duopoly model ispresented to analyse the mutual incentive for firms toenter into particular trading relationships. Whenswitching costs are high, then integrated structuresare predicted. On the other hand, when lock in effectsare not too relevant, mixed structures withindependent and integrated firms emerge as anequilibrium in growing industries. The results arediscussed with reference to the UK mobiletelecommunications industry.     

Determinants of income diversification amongst rural households in Southern Mali

Household-level panel data from a representative sample of rural households in Southern Mali describing the different sources of household income are used to examine the determinants of income diversification. A conditional fixed effects logit model is employed in the analysis to control for household-specific effects. We find evidence that poorer households have fewer opportunities in non-cropping activities such as livestock rearing and non-farm work, and hence less diversified incomes. This appears to reflect their relative lack of capital, which makes it difficult for them to diversify away from subsistence agriculture. The results also indicate that households in remote areas are less likely to participate in the non-cropping sector than their counterparts closer to local markets, while households with educated heads are more likely to participate in the non-farm sector than those with illiterate heads. The significance of entry-constraints in explaining portfolio diversification suggests that the role of government in making assets — as well as improved infrastructure — available to poorer households is still essential in promoting income diversification.     

Household income,women’s income share and food calorie intake in South Western Nigeria

Current debates on the nature of intra-household preferences and resource control raises the question of how intra-household redistribution of income from men and women compares with increasing total household income as strategies for increasing calorie intake among low income households. I estimate calorie-income and calorie-women’s income share elasticities for a random sample of low income households from the rural areas of south western Nigeria. I find that calorie-income elasticity is positive and small, 0.194, but four times as large as calorie-women’s income share elasticity, suggesting that calorie intake is affected more by total disposable income than by its distribution pattern. Second, I find a small and negative effect of women’s income share on per caput calorie intake, −0.04, which is a rejection of the hypothesis that increases in women’s share of income will increase calorie intake and suggests that intra-household income re-distribution from men to women may not be an effective policy for increasing food calorie intake among households in the study area.     

The dynamics of livelihood diversification in post-famine Ethiopia

Based on data for almost 300 households this paper explores associations among income diversification, household perceptions of livelihood risks, and changes in consumption outcomes across two points in time in post-famine Ethiopia. Four key questions are addressed: i) To what extent did households emerging from the famine period with relatively higher income and calorie consumption levels also have a more diversified income base?; ii) Was higher income diversification in 1989 associated with higher income and consumption levels by 1994?; iii) Which households increased their share of income from non-cropping activities most during the inter-survey years?; and iv) Did household heads perceive a lack of non-farm income activities to be an important risk factor in famine vulnerability? We find that wealthier households tended to have more diversified income streams; those initially more diversified subsequently experienced a relatively greater increase in both income and calorie intake; households with a greater concentration of assets were more likely to fall in their relative outcome ranking (as were female-headed households); and, initially less diversified households subsequently realized greater gains in income diversification. We also find suggestive evidence that personal perceptions of risk factors guided subsequent diversification decisions.     

Verteilungswirkungen des EEG

The Renewal Energies Act has so far been one of the cornerstones of the energy revolution. As a result of the Act the production of electricity from renewable sources has been considerably increased. As the most expensive forms of renewable energies have grown fastest, average costs have not shrunk but have risen significantly. The ongoing growth led to increasing subsidies for renewable energies and growing costs for electricity consumers in business and private households. It would be insufficient to look at absolute cost developments only, as distribution effects may be critical. As electricity consumption only slightly depends on household income, higher income leads to lower significance of electricity costs. Therefore, low income households bear a relatively higher burden of costs for renewable energies. Furthermore, wealthy households could benefit from the subsidies as they can invest in renewable energy systems.     

Technological Incompatibility, Endogenous Switching Costs and Lock-in

Systems are goods comprising of durables that are sequentially updated with complements. With sequential purchases, if suppliers produce incompatible brands, consumers who upgrade systems with complements of a different brand must replace the durables they own. Thus, the price of these durables is an endogenous switching cost. The paper deals with the concern that firms may use incompatibility to create consumer's switching costs to reduce competition in aftermarkets. However, it shows that, with homogenous durables, and small costs of reaching compatibility, endogenous switching costs increase intertemporal price competition to the extent that producers prefer to have compatible technologies.     

Borrower Attitudes Toward Alternative Mortgage Instruments*

Much of the existing literature on homeownership assumes that financial markets work well enough to allow households to translate permanent income into effective demand. However, transaction costs, imperfections, and uncertainties all constrain the markets' operation so that people are often forced to choose a quantity of housing stock that diverges from their desired consumption level. Instead of being able to borrow against future income for the down payment or to make monthly payments in a pattern that matches future income, young families in their early years may be constrained from purchasing the size house they desire, and older households may remain in homes larger than they need. In light of these market imperfections, housing and tenure decisions depend not only on permanent income and the relative price of housing services, but also on such mortgage parameters as monthly payment patterns, down payment, and rate of equity accumulation. Models of the demand for housing and homeownership described in the existing literature do not include these parameters of mortgage finance. Mortgage terms are important factors in housing consumption and investment decisions. Because the standard mortgage no longer seems appropriate for all households under all economic conditions, the extent to which alternative mortgage instruments meet the requirements and preferences of different segments of the market becomes an important issue.     

Finnish Homes—Through Passages or Traps?

This is a study of tenure choice, housing demand and mobility in the submarkets of the Helsinki metropolitan area. The empirical analysis is based on data on households, type of tenure, housing characteristics and mobility for a sample of Helsinki residents at the end of 1980s. According to our results the probability of owning is affected not only by user costs of alternative tenure forms but also by permanent income and demographic variables. Results from the tenure specific housing demand models indicate that there are non-neutralities in the housing markets. Permanent income elasticities of housing demand are clearly positive in owner-occupied sector and systematically higher than in the rented sector. The demand for owner-occupied housing depends very strongly on the age of the household head. User cost per housing unit affects housing demand negatively in both tenure forms. Effective demand is greater in private housing sector. The results suggest that owner-occupied living is preferred with heavily subsidized households the least likely to move. In the rental sector, where the probability of moving is higher, it is also true that the most heavily subsidized households are the least likely to move.     

Structure and Profitability in Banking Markets

We use the structure-performance model and regression analysis to investigate a number of analytical issues that often arise in evaluating competition in connection with bank mergers and that are generally relevant to mergers in other industries. Perhaps our most consistent and strongest finding is that the local market HHI is positively and significantly related to profitability. We also find that the number of organizations and the level of recent deposit growth may provide some additional information on the level of competition. Finally, several variables including market size, the number of large banking firms, deposits per office, and resident migration rates exhibit similar relationships to profitability in the bivariate analysis, suggesting that there may be some characteristic associated with market size, density, or attractiveness that is important for competition.     

Non-farm income,gender, and inequality: evidence from rural Ghana and Uganda

This paper examines how the distribution of earnings in rural Ghana and Uganda differs by income type and by gender. We find that non-farm earnings contribute to rising inequality, but that lower income groups also benefit due to strong overall growth in non-farm earnings. The inequality-inducing effect is driven by self-employment income; wage income, on the other hand, reduces inequality. The tendency of non-farm income to contribute to inequality is greater among female-headed households for whom self-employment is important and non-farm opportunities more constrained. Determinants of non-farm income are estimated and appear to be strongly related to location, education, age, and distance to market. Estimates of the linkages to agriculture in Ghana are weaker than expected, showing the non-farm sector to be functioning more as an alternative activity to agriculture than as a complement.     

Do Tenants Capture the Benefits from the Low‐Income Housing Tax Credit Program?

This article compares the rent savings accrued by recipient households over the life cycle of Low‐Income Housing Tax Credit (LIHTC) projects to their allocated tax credits. A simple two‐stage empirical procedure is developed and implemented for a selected medium‐sized metropolitan statistical area. Using hedonic pricing parameters estimated in the first stage, LIHTC ceiling rents are compared to predicted market rents. The findings indicate rent savings constitute a relatively small fraction of the programs costs, suggesting developers and investors may capture some of the program's benefits. As this finding characterizes only one potential source of benefits of the LIHTC program, a brief discussion of other potential benefits to low‐income households supplements the analysis.     

Housing Adjustment Costs: Their Impact on Mobility and Housing Demand Elasticities

The role of housing adjustment costs in influencing mobility decisions, and the relationship between these and housing demands is not well understood. Here we try to examine how changes in adjustment costs as well as in such demand factors as income, influence the decision of households to adjust their housing consumption through moving. Empirically, we use a sample of recently moving homeowners from the PSID and provide evidence indicating adjustment costs are more important than other demand factors in influencing mobility decisions. We also argue that sample selection may bias estimates of housing demand elasticities when the sample is restricted to recent movers because the influence of adjustment costs in the mobility decision are not accounted for. Testing for this using the Heckman two-stage procedure, however, showed this was not a significant problem.     

Broadband Internet access,awareness, and use: Analysis of United States household data

Data obtained from a nationwide survey of US residences during September and October 2002 are used to investigate household awareness of high-speed Internet access, profile Internet access and use, and gain insight into how important always-on, price, speed, installation, and reliability attributes are in their choice of service. Preliminary analysis suggests relatively high awareness of cable modem and DSL availability. Almost 19 percent of the sample have high-speed connectivity, and the mean price paid per month for dial-up and high-speed access is $19.76 and $42.36, respectively. Preference for high-speed access is apparent among households with higher income and college education. About 63 percent of high-speed users have more than five years of online experience, compared to 48 percent of dial-up users, and high-speed users are twice as likely to share music files and photos, bank, trade stocks, and pay bills “many times a week” than dial-up users. Willingness-to-pay estimates indicate reliability of service, speed, and always-on connectivity are important Internet access attributes.