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Switching Costs in Two-sided Markets

Author

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  • LAM, W.

    (University of Liege)

Abstract

In many markets, there are switching costs and network effects. Yet the literature gen- erally deals with these two concepts separately. This paper bridges the gap by analyzing their interaction effects (or “indirect bargain”) in a dynamic two-sided market. I show that in a symmetric equilibrium, the classic result that the first-period price is U-shape in switching costs does not emerge, but instead switching costs always intensify first-period price competition. Moreover, an increase in switching costs on one side decreases the first- period price on the other side. Thus policies that ignore these effects may underestimate the welfare-enhancing effects of switching costs.

Suggested Citation

  • Lam, W., 2015. "Switching Costs in Two-sided Markets," LIDAM Discussion Papers CORE 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2015024
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2015.html
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    References listed on IDEAS

    as
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    2. Attila Ambrus & Rossella Argenziano, 2009. "Asymmetric Networks in Two-Sided Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 17-52, February.
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    5. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
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    7. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
    8. Jonathan D. Levin, 2011. "The Economics of Internet Markets," NBER Working Papers 16852, National Bureau of Economic Research, Inc.
    9. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    10. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
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    12. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    13. Severin Borenstein & Jeffrey K. Mackie‐Mason & Janet S. Netz, 2000. "Exercising Market Power in Proprietary Aftermarkets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 157-188, June.
    14. Gary Biglaiser & Jacques Crémer, 2011. "Equilibria in an infinite horizon game with an incumbent, entry and switching costs," International Journal of Economic Theory, The International Society for Economic Theory, vol. 7(1), pages 65-75, March.
    15. repec:hrv:faseco:4589709 is not listed on IDEAS
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    17. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    18. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
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    Cited by:

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    More about this item

    Keywords

    switching costs; two-sided markets; network externality; myopia; loyalty;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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