Switching cost and store choice

Switching costs are generally regarded as anticompetitive firms can raise prices to “locked-in” consumers, at least up the cost of switching a lower-priced alternative. However, there is some evidence, both theoretical and empirical, that tends show opposite. Namely, suppliers, anticipating pool rents potentially available, compete aggressively acquire non-switching consumers. Moreover, fixed shopping uncertain imply “real option” value embedded in consumers’ behavior, which must be priced compensated if consumers switch stores. We argue retail lower when retailers use programs designed increase customer retention, or “stickiness.” test our theory using panel household-level, store-choice data. Contrary conventional wisdom, we find loyalty pro-competitive leads than would otherwise case. also approximately 50% cumulative effect attributable existence real option due price uncertainty substantial comprise around 12% average basket groceries.