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Switching Costs and Dynamic Price Competition in Network Industries

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Abstract

Motivated by policy makers' recent interest in reducing switching costs in various network industries to increase competition, this paper investigates how switching costs affect market outcome in such industries. The results show that the effects of switching costs on market concentration and prices critically depend on two factors: the strength of network effects and the quality of the outside good. For example, switching costs lower prices if network effects are modest and the outside good is attractive, but raise prices otherwise. Therefore, policy makers need to carefully evaluate those two factors in order to make informed decisions.

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File URL: http://www.netinst.org/Chen_09-25.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 09-25.

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Length: 40 pages
Date of creation: Oct 2009
Date of revision: Apr 2010
Handle: RePEc:net:wpaper:0925

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Web page: http://www.NETinst.org/

Related research

Keywords: Switching Costs; Network Effects; Dynamic Oligopoly; Market Dominance; Pricing;

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  1. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, October.
  2. Ulrich Doraszelski & Sarit Markovich, 2007. "Advertising dynamics and competitive advantage," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 557-592, 09.
  3. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521805001, October.
  4. Suleymanova, Irina & Wey, Christian, 2011. "Bertrand competition in markets with network effects and switching costs," DICE Discussion Papers 30, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
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