Competition and Dynamic Pricing in Markets with Consumer Switching Costs

In markets with switching costs, prices increase as firms’ market shares grow. I study the effect of entry on these price dynamics in the Dutch mortgage market. I exploit incumbents’ multi-product nature to control for unobserved firm-level differences, while a difference-indifferences strategy controls for market-level shocks by exploiting that only some mortgage products faced increased competition. Consistent with a simple theoretical framework, banks with more locked-in customers decrease their interest rates less after entry than smaller incumbents. This can explain why policies that encourage competition often disappoint in markets with switching costs. I also discuss implications for competition policy.