On the Value of a Large Customer Base in Markets with Consumer Switching Costs

It is usually acknowledged that firms benefit from a large customer base when consumers face costs of switching the supplier. Klemperer (1995) points out that this may not be true if an increase in the size of a firm’s customer base induces fiercer price competition, possibly making the firm worse off. This paper shows that such an outcome is not a mere theoretical possibility but may be empirically relevant. It is shown to be obtained under plausible conditions, in particular homogeneous goods and dispersed switching costs. The prediction that switching costs make markets less competitive is stronger than previously shown.