Anchoring effects, switching costs, and market competition

Based on the model of Klemperer (1987) with switching costs, we introduce consumers' anchoring effects into a two-period pricing game. In a symmetric equilibrium, when the degree of anchoring effects is low enough, the switching costs will work in terms of the second-period price competition. Each firm pays more attention to pursue market share by pricing lower in the first period hut exploit the surpluses of attached consumers by charging a higher price in the second period. However, when the degree of anchoring effects is high enough, the switching costs won't work, so each firm will take an adverse pricing strategy. Especially, when there are perfect anchoring effects among consumers, we will achieve a "Supermonopoly-Bertrand Equilibrium ".