Switching Costs, Dynamic Uncertainty, and Buyer-Seller Relationships

We analyze strategic relationships between buyers and sellers in markets with switching costs and dynamic uncertainty by investigating the scenario wherein a representative buyer trades with two foreign sellers located in the same foreign country. We show that, under exchange rate uncertainty, switching costs may lead to switching equilibria where both sellers co-exist in the market with the buyer, or no-switching equilibria where either seller captures the market. The presence of exchange rate uncertainty facilitates competition by allowing the sellers to co-exist in the market with the buyer. However, if the level of uncertainty is beyond a threshold, the only viable equilibria are those where one of the sellers captures the market. Further, depending on the level of exchange rate uncertainty and the sellers' variable costs, switching costs may either raise or lower the level of prices in long-term contracts between the buyer and the sellers