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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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  • Jiawei Chen, 2009. "Switching Costs and Dynamic Price Competition in Network Industries," Working Papers 09-25, NET Institute, revised Apr 2010.
  • Handle: RePEc:net:wpaper:0925
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    1. 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.
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    3. Minjung Park, 2011. "The Economic Impact of Wireless Number Portability," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 714-745, December.
    4. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, March.
    5. Matthew T. Clements & Hiroshi Ohashi, 2004. "Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002," CIRJE F-Series CIRJE-F-261, CIRJE, Faculty of Economics, University of Tokyo.
    6. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    7. Ulrich Doraszelski & Sarit Markovich, 2007. "Advertising dynamics and competitive advantage," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 557-592, September.
    8. Doganoglu Toker & Grzybowski Lukasz, 2013. "Dynamic Duopoly Competition with Switching Costs and Network Externalities," Review of Network Economics, De Gruyter, vol. 12(1), pages 1-25, March.
    9. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521805001, March.
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    More about this item

    Keywords

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

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