Product innovation when consumers have switching costs
AbstractEconomists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with firstmover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, which must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.
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Bibliographic InfoPaper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2011-07.
Date of creation: Mar 2011
Date of revision:
Business Economics; Cognitive & Behavioural Economics; Competition policy; Consumer switching cost; Game Theory; History of Economic Thought; Industrial Competition; Innovation; Marketing; Microeconomics; Regulation; Search costs;
Other versions of this item:
- Salies, Evens, 2010. "Product innovation when consumers have switching costs," MPRA Paper 28884, University Library of Munich, Germany, revised 11 Feb 2011.
- Evens Salies, 2011. "Product innovation when consumers have switching costs," Sciences Po publications 2011-07, Sciences Po.
- B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
- D4 - Microeconomics - - Market Structure and Pricing
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-18 (All new papers)
- NEP-BEC-2011-06-18 (Business Economics)
- NEP-COM-2011-06-18 (Industrial Competition)
- NEP-INO-2011-06-18 (Innovation)
- NEP-IPR-2011-06-18 (Intellectual Property Rights)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jackie Krafft & Evens Salies, 2008.
"Why and how should innovative industries with high consumer switching costs be re-regulated?,"
Documents de Travail de l'OFCE
2008-04, Observatoire Francais des Conjonctures Economiques (OFCE).
- Evens Salies & Jackie Krafft, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated ?," Sciences Po publications 2008-13, Sciences Po.
- Jackie Krafft & Evens Salies, 2009. "Why and how should innovative industries with high consumers' switching costs be re-regulated?," Post-Print hal-00239289, HAL.
- Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated?," Documents de Travail de l'OFCE 2008-13, Observatoire Francais des Conjonctures Economiques (OFCE).
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The Warwick Economics Research Paper Series (TWERPS)
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- Krafft, Jackie & Salies, Evens, 2008. "The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case," Research Policy, Elsevier, vol. 37(4), pages 706-719, May.
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- Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
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