Switching costs and network compatibility

Jiawei Chen

International Journal of Industrial Organization, 2018, vol. 58, issue C, 1-30

Abstract: This paper investigates how consumer switching costs affect firms’ compatibility choices and social welfare in network industries. Firms face a choice between two modes of competition: make their networks incompatible and compete fiercely for market dominance, or make their networks compatible and have mild competition. By incentivizing firms to harvest their locked-in consumers rather than price aggressively for market dominance, switching costs tip the balance in favor of compatible networks and mild competition. A public policy that reduces switching costs also tends to make networks incompatible, and results in small efficiency gains at best. Combining the policy with a mandatory compatibility policy, however, can lead to sizable efficiency gains.

Keywords: Switching costs; Network compatibility; Industry dynamics; Welfare (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:58:y:2018:i:c:p:1-30

DOI: 10.1016/j.ijindorg.2017.12.003

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