Product innovation when consumers have switching costs
Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with first-mover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, that must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.
|Date of creation:||17 Sep 2010|
|Date of revision:||11 Feb 2011|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- Jackie Krafft & Evens Salies, 2008.
"Why and how should innovative industries with high consumer switching costs be re-regulated?,"
Documents de Travail de l'OFCE
2008-04, Observatoire Francais des Conjonctures Economiques (OFCE).
- Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated?," Documents de Travail de l'OFCE 2008-13, Observatoire Francais des Conjonctures Economiques (OFCE).
- Evens Salies & Jackie Krafft, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated ?," Sciences Po publications 2008-13, Sciences Po.
- Jackie Krafft & Evens Salies, 2009. "Why and how should innovative industries with high consumers' switching costs be re-regulated?," Post-Print hal-00239289, HAL.
- Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated ?," Working Papers hal-00973051, HAL.
- Joseph Farrell and Carl Shapiro., 1988.
"Dynamic Competition with Switching Costs,"
Economics Working Papers
8865, University of California at Berkeley.
- Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
- Beggs, Alan, 1989. "A Note on Switching Costs and Technology Choice," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 437-40, June.
- Pankaj Ghemawat, 1991. "Market Incumbency and Technological Inertia," Marketing Science, INFORMS, vol. 10(2), pages 161-171.
- Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
- Pae, Jae H. & Hyun, Jung Suk, 2006. "Technology advancement strategy on patronage decisions: the role of switching costs in high-technology markets," Omega, Elsevier, vol. 34(1), pages 19-27, January.
- Jackie Krafft & Evens Salies, 2009. "Why and How Should New Industries with High Consumer Switching Costs be Regulated? The Case of Broadband Internet in France," Chapters, in: Regulation, Deregulation, Reregulation, chapter 14 Edward Elgar Publishing.
- 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.
- Waterson, Michael, 2001. "The role of consumers in competition and competition policy," The Warwick Economics Research Paper Series (TWERPS) 607, University of Warwick, Department of Economics.
- 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.
- 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.
- Varadarajan, Rajan, 2009. "Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations," Business Horizons, Elsevier, vol. 52(1), pages 21-29.
- Morgan, Robert M. & Hunt, Shelby, 1999. "Relationship-Based Competitive Advantage: The Role of Relationship Marketing in Marketing Strategy," Journal of Business Research, Elsevier, vol. 46(3), pages 281-290, November.
- 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.
- Bhattacharyya, Sugato & Nanda, Vikram, 2000. "Client Discretion, Switching Costs, and Financial Innovation," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1101-27.
- Mueller, Dennis C., 1997. "First-mover advantages and path dependence," International Journal of Industrial Organization, Elsevier, vol. 15(6), pages 827-850, October.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:28884. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.