Price Duopoly in a Default Service Market with Search and Switching Costs ∗ Jon Thor Sturluson † Bifröst School of Business and Institute of Economic Studies Abstract This paper develops a simple model of a asymmetric price duopoly, where one firm is an incumbent with an established relationship to all consumers, while the other firm is a new entrant in the market. Consumers have different consumption levels and can face a switching cost or a search cost. Retail elec- tricity markets are the prime example. Given conditions on the distribution of these costs, an asymmetric equilibrium in prices exists. In equilibrium, the rate of switching can be a bad measure of market performance. A decrease in switching costs affects prices for the benefit of all consumers and not only those who choose to switch. A decrease in search costs is likely to be primarily in the interest of those consumers that do not wish to search. This suggests a free-rider problem, discouraging search as well as switching. Keywords: Retailing, default services, price competition, switching costs, search costs, electricity. JEL classification: L13, D19. ∗ Financial support from the Nordic Energy Research Program is gratefully acknowledged. † Contact information: Icelandic Centre of Retailing Studies, Bifröst School of Business, 311 Borgarnes, Iceland. e-mail: jonthor@bifrost.is 1