IDEAS home Printed from https://ideas.repec.org/a/inm/orisre/v13y2002i3p255-274.html

Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry

Author

Listed:
  • Pei-Yu (Sharon) Chen

    (Graduate School of Industrial Administration, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, Pennsylvania 15213)

  • Lorin M. Hitt

    (The Wharton School, University of Pennsylvania, 1318 Steinberg Hall-Dietrich Hall, Philadelphia, Pennsylvania 19104)

Abstract

The ability to retain and lock in customers in the face of competition is a major concern for online businesses, especially those that invest heavily in advertising and customer acquisition. In this paper, we develop and implement an approach for measuring the magnitudes of switching costs and brand loyalty for online service providers based on the random utility modeling framework. We then examine how systems usage, service design, and other firm and individual-level factors affect switching and retention. Using data on the online brokerage industry, we find significant variation (as much as a factor of two) in measured switching costs. We find that customer demographic characteristics have little effect on switching, but that systems usage measures and systems quality are associated with reduced switching. We also find that firm characteristics such as product line breadth and quality reduce switching and may also reduce customer attrition. Overall, we conclude that online brokerage firms appear to have different abilities in retaining customers and have considerable control over their switching costs.

Suggested Citation

  • Pei-Yu (Sharon) Chen & Lorin M. Hitt, 2002. "Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry," Information Systems Research, INFORMS, vol. 13(3), pages 255-274, September.
    • Handle: RePEc:inm:orisre:v:13:y:2002:i:3:p:255-274
    DOI: 10.1287/isre.13.3.255.78
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/isre.13.3.255.78
    Download Restriction: no
    File URL: https://libkey.io/10.1287/isre.13.3.255.78?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
    2. Thomas P. Novak & Donna L. Hoffman & Yiu-Fai Yung, 2000. "Measuring the Customer Experience in Online Environments: A Structural Modeling Approach," Marketing Science, INFORMS, vol. 19(1), pages 22-42, May.
    3. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    4. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    5. Yannis Bakos, 2001. "The Emerging Landscape for Retail E-Commerce," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 69-80, Winter.
    6. William H. DeLone & Ephraim R. McLean, 1992. "Information Systems Success: The Quest for the Dependent Variable," Information Systems Research, INFORMS, vol. 3(1), pages 60-95, March.
    7. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    8. 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.
    9. Detmar W. Straub & Richard T. Watson, 2001. "Research Commentary: Transformational Issues in Researching IS and Net-Enabled Organizations," Information Systems Research, INFORMS, vol. 12(4), pages 337-345, December.
    10. Kenneth G. Elzinga & David E. Mills, 1998. "Switching Costs in the Wholesale Distribution of Cigarettes," Southern Economic Journal, Southern Economic Association, vol. 65(2), pages 282-293, October.
    11. Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    12. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    13. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
    14. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gabrielsen, Tommy Staahl & Vagstad, Steinar, 2003. "Consumer heterogeneity, incomplete information and pricing in a duopoly with switching costs," Information Economics and Policy, Elsevier, vol. 15(3), pages 384-401, September.
    2. Yang Yang & Cheng-Hung Wu, 2024. "Competition and market dynamics in duopoly: the effect of switching costs," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 46(1), pages 211-235, March.
    3. Miguel Villas-Boas, J., 2015. "A short survey on switching costs and dynamic competition," International Journal of Research in Marketing, Elsevier, vol. 32(2), pages 219-222.
    4. Chod, Jiri & Lyandres, Evgeny, 2023. "Product market competition with crypto tokens and smart contracts," Journal of Financial Economics, Elsevier, vol. 149(1), pages 73-91.
    5. Xuying Zhao & Hong Guo & Gangshu Cai & Subhajyoti Bandyopadhyay, 2021. "The Role of Expectation–Reality Discrepancy in Service Contracts," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4160-4175, November.
    6. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
    7. Eric Anderson & Nanda Kumar, 2007. "Price competition with repeat, loyal buyers," Quantitative Marketing and Economics (QME), Springer, vol. 5(4), pages 333-359, December.
    8. Amit Mehra & Ram Bala & Ramesh Sankaranarayanan, 2012. "Competitive Behavior-Based Price Discrimination for Software Upgrades," Information Systems Research, INFORMS, vol. 23(1), pages 60-74, March.
    9. Fourberg, Niklas, 2023. "Let's lock them in: Collusion under consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 91(C).
    10. Soumya Ray & Sung S. Kim & James G. Morris, 2012. "Research Note ---Online Users' Switching Costs: Their Nature and Formation," Information Systems Research, INFORMS, vol. 23(1), pages 197-213, March.
    11. Jonathan D. Bohlmann & Michael A. Stanko & Jelena Spanjol, 2024. "Incumbent inertia, innovativeness, and performance (dis)advantages: A demand-side learning perspective," AMS Review, Springer;Academy of Marketing Science, vol. 14(1), pages 122-142, June.
    12. Jason Allen & Shaoteng Li, 2025. "Dynamic Competition in Negotiated Price Markets," Journal of Finance, American Finance Association, vol. 80(1), pages 561-614, February.
    13. Sherzod B. Akhundjanov & Ben O. Smith & Max St. Brown, 2023. "Path Dependence as a Path to Consumer Surplus and Loyalty," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(1), pages 1-20, August.
    14. Suleymanova Irina & Wey Christian, 2011. "Bertrand Competition in Markets with Network Effects and Switching Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-58, September.
    15. Tat Chan & Chakravarthi Narasimhan & Ying Xie, 2013. "Treatment Effectiveness and Side Effects: A Model of Physician Learning," Management Science, INFORMS, vol. 59(6), pages 1309-1325, June.
    16. Mengze Shi & Jeongwen Chiang & Byong-Duk Rhee, 2006. "Price Competition with Reduced Consumer Switching Costs: The Case of "Wireless Number Portability" in the Cellular Phone Industry," Management Science, INFORMS, vol. 52(1), pages 27-38, January.
    17. Mark J. Tremblay, 2019. "Platform Competition and Endogenous Switching Costs," Journal of Industry, Competition and Trade, Springer, vol. 19(4), pages 537-559, December.
    18. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
    19. Hess, Mike & Ricart, Joan E., 2002. "Managing customer switching costs: A framework for competing in the networked environment," IESE Research Papers D/472, IESE Business School.
    20. Rizkiah, Siti K. & Disli, Mustafa & Salim, Kinan & Razak, Lutfi A., 2021. "Switching costs and bank competition: Evidence from dual banking economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orisre:v:13:y:2002:i:3:p:255-274. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.