Two Kinds of Consumer Switching Costs

In this article, I introduce a distinction between two kinds of consumer switching costs: and costs. While transaction costs are incurred by a consumer at every switch between suppliers, learning costs are incurred only at a switch to a supplier that is new to him. In a multiperiod duopoly model, I examine the effects of changing the proportion of each kind of consumer switching costs, while holding total switching costs constant. I show that an increase in transaction costs, relative to learning costs, increases the price offered to loyal consumers. This, then, has the further effect of decreasing the introductory price in the market. It also leads to a decrease in welfare.