How do Switching Costs Affect Market Concentration and Prices in Network Industries?

Jiawei Chen

No 1428, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Switching costs are present in most network industries, and this paper investigates their effects on the market outcome. I find that the role of switching costs critically depends on the strength of network effects and the quality of the outside option. Without a viable outside option, high switching costs can neutralize the tendency towards market dominance associated with network effects, but with a viable outside option, switching costs facilitate market dominance. Furthermore, switching costs lower prices if network effects are modest and there exists a viable outside option, but raise prices otherwise. Understanding these patterns will allow us to better predict the consequences of public policies that change switching costs.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1428

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