Switching Costs, Network Effects, and Competition in the European Mobile Telecommunications Industry

This paper empirically analyzes the joint effect of switching costs and network effects in determining the level of competition in the European mobile communications industry. Theoretical reasoning argues that switching costs and network effects may confer some market power that firms can strategically exploit to reduce competition and thus increase profits. Theoretical predictions are completely confirmed by the empirical evidence and important asymmetries between the market structures in the different European countries can be observed. These asymmetries are clearly related to the levels of switching costs and network effects---the greater their importance, the lower the rivalry in the market. This suggests that the recent efforts of policymakers to reduce the negative consequences of switching costs and network effects have not been successful enough and these efforts must be strengthened, at least in several countries.