Ep. 14 - Do Switching Costs Make Markets Less Competitive? With JP Dube, Gunter Hitsch, and Peter Rossi
How I Wrote This
Deep Dive
What are switching costs, and how do they affect consumer behavior?
Switching costs are the costs consumers incur when changing from one product or service to another. These can be explicit, like contract termination fees, or implicit, such as the time and effort required to learn a new system. Switching costs create state dependence, where past choices influence future decisions. For example, a consumer may stick with a brand due to psychological switching costs, often referred to as brand loyalty, which makes them less likely to switch even if competitors offer lower prices.
What was the main finding of the paper 'Do Switching Costs Make Markets Less Competitive?'?
The paper found that, contrary to theoretical predictions, switching costs do not necessarily lead to higher prices. In fact, the researchers' simulations showed that prices could be 18% lower in markets with switching costs compared to those without. This challenges the long-standing belief that switching costs insulate consumers from competitive pricing and instead suggests that firms may lower prices to attract and retain customers.
How did the collaboration for this paper evolve?
The collaboration began with a lunch conversation between JP Dubé and Gunter Hitsch, where they questioned the importance of lagged choice variables in demand models. They later involved Peter Rossi, who suggested using Bayesian methods for their analysis. The project evolved from debunking the significance of lagged choice variables to exploring the implications of switching costs on competitive pricing, ultimately leading to a three-way collaboration.
What challenges did the authors face during the review process?
The authors faced significant pushback during the review process, particularly from Marketing Science, where one reviewer dismissed their findings as 'obvious' despite contradicting established theoretical literature. The authors chose not to weaken their paper to appease reviewers and instead submitted it elsewhere. This decision highlights the importance of standing by one's research and not compromising on its integrity to meet reviewer demands.
What advice do the authors give to junior researchers?
The authors advise junior researchers to seek feedback from experienced scholars, even if it is intimidating, as it can significantly improve their work. They also emphasize the importance of pursuing research that excites them rather than following trends or strategic publishing goals. Sticking to one's passions and finding a supportive academic environment are key to a productive and impactful career.
Why did the authors split their original paper into two separate publications?
The authors initially submitted a comprehensive paper that combined empirical analysis and theoretical implications. However, reviewers and editors suggested splitting the paper because it was too broad and difficult to evaluate as a single piece. The decision to split allowed them to focus more clearly on distinguishing between structural state dependence and other explanations in one paper, while exploring the marketing implications of switching costs in another.
- Introduction of switching costs via personal example (Old Spice deodorant)
- Long history of switching cost research in marketing and economics
- Prevailing theory suggests switching costs lead to higher prices
Shownotes Transcript