publication . Article . Preprint . 2006

Coordination and Lock-In: Competition with Switching Costs and Network Effects

Farrell, Joseph; Klemperer, Paul;
Open Access
  • Published: 01 May 2006
  • Publisher: eScholarship, University of California
Abstract
Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power—over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such “competition for the market" or “life-cycle competition" can adequately replace ordinary compatible competition, and can even ...
Subjects
free text keywords: switching costs, network effects, lock-in, network externalities, co-ordination, indirect network effects, market structure, firm strategy and market performance, oligopoly and other imperfect markets, monopolistic competition, contestable markets, information and product quality, standardization and compatibility, monopoly, transactional relationships, contracts and reputation, networks, market structure and pricing, oligopoly and other forms of market imperfection, market structure and pricing, market structure, coordination; indirect network effects; lock-in; network effects; network externalities; switching costs, contestable markets, networks, firm strategy and market performance, monopoly, network effects, network externalities, contracts and reputation, Switching Costs, Network Effects, Lock-in, Network Externalities, Co-ordination, Indirect Network Effects, monopolistic competition, transactional relationships, indirect network effects, oligopoly and other imperfect markets, lock-in, standardization and compatibility, co-ordination, information and product quality, switching costs, market structure and pricing, oligopoly and other forms of market imperfection, jel:D43, jel:D42, jel:L15, jel:L14, jel:L13, jel:L12
166 references, page 1 of 12

9Schmalensee (1982) and Villas Boas (2006) analyse models of experience goods that show similarities to switching costs models. Hakanes and Peitz (2003) and Doganoglu (2004) model experience goods when there are also learning or transactional switching costs; Doganoglu shows that adding small switching costs to Villas Boas' (2006) model can sometimes reduce price levels. 10For related models in which consumers di er in their \quality" from rms' point of view, and rms are uncertain about consumers they have not supplied and can exploit those they know to be of \high quality", see, for example, Nilssen (2000) and Cohen (2005) on insurance markets and Sharpe (1990) and Zephirin (1994) on bank loan markets. 11Aftermarkets have been much studied since a US Supreme Court decision (ITS v.

Kodak) held that it was conceptually possible for ITS, an independent repair rm, to prove that Kodak had illegally monopolized the aftermarket for servicing Kodak photocopiers: see e.g. Shapiro (1995), Shapiro and Teece (1994), MacKie-Mason and Metzler (1999), and Borenstein, MacKie-Mason, and Netz (1995, 2000). 12If the unadvertised follow-on product is always purchased, it can be interpreted as the \quality" of the advertised product { see Ellison (2005) and Vickers (2003). 13Gabaix and Laibson (2006) analyse this case when only some consumers are rational.

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publication . Article . Preprint . 2006

Coordination and Lock-In: Competition with Switching Costs and Network Effects

Farrell, Joseph; Klemperer, Paul;