With increasing pA1, A2 decreases. Consequently, the business model relies on setting low prices in period 1, pA1, to capture a larger market share and raise prices in pA2, to maximise profits. For instance, in the electricity retail market, a dispersion of prices exists through a range of different tariffs offered to consumers. (Giulietti, et al., 2014)

In essence, firms exploit people who are generally less tech savvy, resistant to change and less willing or able to go through the hassle of searching e.g. the elderly. Ofcom studies show ‘customers with landline and broadband service together pay on average 19% more after their discount deal has expired…94% of individuals can switch to faster broadbands but less than half choose to’ (Sweney, 2018).

Consumer and firm behaviour are together responsible for this strange phenomenon. While consumers may remain stubbornly loyal, for those that do wish to switch, firms respond by endogenously increasing switching costs. I illustrate the economics behind this behaviour using the Belleflame and Pietz model. Here, r, is the reservation price, x, is the distance from the consumer to the firm and pxy, is the price charged by firm x in period y. We assume customers are uniformly distributed along a unit line.

In the first period model, the consumer purchases from firm A if the inequality holds:

In a two-period model, customers that buy from firm A continue to do so with the switching cost, z, if:

Switching costs relaxes price competition between firms by creating a “dead area”, as long as price differences between rivals are not too large. This is because these exit fees can offset savings incurred by switching. However, there are also other important factors we can consider. Customer loyalty, f(l), is likely to ensure that a customer stays with the incumbent firm whilst search costs, s, makes it more expensive for customers to find better deals, thereby decreasing the proportion of people that will switch suppliers. Customers continue to buy from the same firm if:

Firms are also devious in creating endogenous switching costs. Companies like Vodafone are