Consumer Switching Costs and Private Information
Erick Elder and Ted To
We consider a standard model of consumer switching costs with demand uncertainty where
firms observe private information about demand. Given this private information, each firm forms
beliefs over different demand realizations as well as beliefs over the other firm’s information. The
main result here is that in the first period, if firms observe information suggesting that future
demand is likely to be high, they will price aggressively, sacrificing current profits for higher
market share and the expectation of higher future profits.
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