In the present paper we present
an empirical model of firms' strategic behavior in the presence of switching
costs. Consumers' transition probabilities embeded in firms strategic interaction
are used in a two-stage game to derive structural estimable equations of
a first order condition and market-share (demand) equations. The novelty
of the model is in its ability to extract information on both the magnitude
and significance of switching costs, as well as on consumers' transition
probabilities, from conventionally available highly aggregated data which
do not contain consumer-specific information. As a matter of illustration,
the model is applied to panel data of banks, to estimate the switching
costs in the market for bank loans. The point estimate of the average switching
cost is 6.6% which is about one half of the market average interest rate
on loans for the investigated period. The model estimates imply a 14 years
average duration of bank-cutomer relationship. The switching cost model
nests the general oligopolistic model and thus, econometric estimation
of the existence and magnitude of switching costs and various aspects of
market behavior is carried out. The presented technique may be applicable
to modelling a wide class of problems where only aggregate data exist. |
