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Switching Costs and Dynamic Price Competition in Network Industries

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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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
Contact details of provider: Web page: http://www.NETinst.org/

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  1. repec:cup:cbooks:9780521805001 is not listed on IDEAS
  2. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2008. "Avoiding Market Dominance: Product Compatibility in Markets with Network Effects," Economics Working Paper Archive 537, The Johns Hopkins University,Department of Economics.
  3. 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.
  4. Ulrich Doraszelski & Sarit Markovich, 2007. "Advertising dynamics and competitive advantage," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 557-592, 09.
  5. 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, 03.
  6. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, September.
  7. Matthew T. Clements & Hiroshi Ohashi, 2004. "Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002," Working Papers 04-01, NET Institute, revised Oct 2004.
  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. repec:cup:cbooks:9780521800952 is not listed on IDEAS
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