How do Switching Costs Affect Market Concentration and Prices in Network Industries?
No 1428, 2011 Meeting Papers from Society for Economic Dynamics
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.
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More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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