Local interactions under switching costs

Abstract

We study the impact of switching costs on the long-run outcome in $$2\times 2$$ coordination games played in the circular city model of local interactions. For low levels of switching costs, the predictions are in line with the previous literature and the risk-dominant convention is the unique long-run equilibrium. For intermediate levels of switching costs, the set of long-run equilibria still contain the risk-dominant convention but may also contain conventions that are not risk dominant. The set of long-run equilibria may further be non-monotonic in the level of switching costs, i.e., as switching costs increase the prediction that the risk-dominant convention is the unique long-run equilibrium and the prediction that both conventions are long-run equilibria alternate. Finally, for high levels of switching costs, also non-monomorphic states will be included in the set of long-run equilibria.