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Why and how should innovative industries with high consumers' switching costs be re-regulated?

  • Jackie Krafft

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis)

  • Evens Salies

    (OFCE-DRIC - OFCE)

The existence of costs to consumers to switch between products is central to the process by which firms set prices. Their effect on the introduction and diffusion of innovative technologies is not by now well understood, however. This paper aims to study this effect based on evidence in the broadband Internet industry and to discuss the movement of deregulation implemented since the early 2000s in France, as well as the apparent emerging potential of re-regulation. We argue the presence of a cost to consumers to switch between technologies may impede the expected beneficial outcomes of self-regulation through competition in liberalised innovative industries as it has been implemented so far in several countries. We provide a measure of the cost to switch from ADSL to cable for retail consumers in France which supports the domination of the former technology. These results suggest that retail broadband Internet markets may need some sort of re-regulation, including new principles for competition policy, to avoid the unwanted effects of consumer switching costs.

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Paper provided by HAL in its series Post-Print with number hal-00239289.

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Date of creation: 2009
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Publication status: Published, Regulation, Deregulation, Reregulation: Institutional Perspectives, Edward Elgar (Ed.), 2009, 327-350
Handle: RePEc:hal:journl:hal-00239289
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00239289/en/
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  1. Green, Richard, 2000. "Can Competition Replace Regulation for Small Utility Customers?," CEPR Discussion Papers 2406, C.E.P.R. Discussion Papers.
  2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
  3. Shy, Oz, 2002. "A quick-and-easy method for estimating switching costs," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 71-87, January.
  4. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. 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.
  6. Morgenstern, Richard & Harrington, Winston & Nelson, Per-Kristian, 1999. "On the Accuracy of Regulatory Cost Estimates," Discussion Papers dp-99-18, Resources For the Future.
  7. Waterson, Michael, 2003. "The role of consumers in competition and competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 129-150, February.
  8. Beggs, Alan, 1989. "A Note on Switching Costs and Technology Choice," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 437-40, June.
  9. Shelanski, Howard A., 2005. "Inter-Modal Competition and Telecommunications Policy in the United States," MPRA Paper 2513, University Library of Munich, Germany.
  10. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  11. Jackie Krafft & Evens Salies, 2006. "The cost of switching Internet providers in the French broadband industry, or why ADSL has diffused faster than other innovative technologies"," Documents de Travail de l'OFCE 2006-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  12. John J. Wallis & Douglass North, 1986. "Measuring the Transaction Sector in the American Economy, 1870-1970," NBER Chapters, in: Long-Term Factors in American Economic Growth, pages 95-162 National Bureau of Economic Research, Inc.
  13. Heiko A. Gerlach, 2004. "Announcement, Entry, and Preemption When Consumers Have Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 184-202, Spring.
  14. Papacharissi, Zizi & Zaks, Anna, 2006. "Is broadband the future? An analysis of broadband technology potential and diffusion," Telecommunications Policy, Elsevier, vol. 30(1), pages 64-75, February.
  15. Oliver E. Williamson, 2005. "The Economics of Governance," American Economic Review, American Economic Association, vol. 95(2), pages 1-18, May.
  16. 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.
  17. Ruth N. Bolton, 1998. "A Dynamic Model of the Duration of the Customer's Relationship with a Continuous Service Provider: The Role of Satisfaction," Marketing Science, INFORMS, vol. 17(1), pages 45-65.
  18. Preston R. Fee & Hugo M. Mialon & Michael A. Williams, 2004. "What Is a Barrier to Entry?," American Economic Review, American Economic Association, vol. 94(2), pages 461-465, May.
  19. von Weizsacker, C Christian, 1984. "The Costs of Substitution," Econometrica, Econometric Society, vol. 52(5), pages 1085-1116, September.
  20. Winston Harrington & Richard D. Morgenstern & Peter Nelson, 2000. "On the accuracy of regulatory cost estimates," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 297-322.
  21. Alleman, James & Rappoport, Paul, 2005. "Regulatory Failure: Time for a New Policy Paradigm," MPRA Paper 2517, University Library of Munich, Germany.
  22. Gans, Joshua S, 2001. "Regulating Private Infrastructure Investment: Optimal Pricing for Access to Essential Facilities," Journal of Regulatory Economics, Springer, vol. 20(2), pages 167-89, September.
  23. repec:cup:cbooks:9780521816632 is not listed on IDEAS
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