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Switching Costs in Two-sided Markets

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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," CORE Discussion Papers 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2015024
    as

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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2015_24web.pdf
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    References listed on IDEAS

    as
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    6. repec:hrv:faseco:4589709 is not listed on IDEAS
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    14. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
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    More about this item

    Keywords

    switching costs; two-sided markets; network externality; myopia; loyalty;

    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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