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How do Switching Costs Affect Market Concentration and Prices in Network Industries?

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  • Jiawei Chen

    (University of California, Irvine)

Abstract

Switching costs are present in most network industries, and this paper investigates their effects on the market outcome. I find that the role of switching costs critically depends on the strength of network effects and the quality of the outside option. Without a viable outside option, high switching costs can neutralize the tendency towards market dominance associated with network effects, but with a viable outside option, switching costs facilitate market dominance. Furthermore, switching costs lower prices if network effects are modest and there exists a viable outside option, but raise prices otherwise. Understanding these patterns will allow us to better predict the consequences of public policies that change switching costs.

Suggested Citation

  • Jiawei Chen, 2011. "How do Switching Costs Affect Market Concentration and Prices in Network Industries?," 2011 Meeting Papers 1428, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1428
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    Cited by:

    1. Grzybowski, Lukasz, 2005. "Essays on Economics of Network Industries: Mobile Telephony," Munich Dissertations in Economics 5561, University of Munich, Department of Economics.
    2. Weiergräber, Stefan, 2014. "Network Effects and Switching Costs in the US Wireless Industry," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 512, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Basaure, Arturo & Suomi, Henna & Hämmäinen, Heikki, 2016. "Transaction vs. switching costs—Comparison of three core mechanisms for mobile markets," Telecommunications Policy, Elsevier, vol. 40(6), pages 545-566.
    4. Jiawei Chen & Michael Sacks, 2016. "Reimbursing Consumers' Switching Costs in Network Industries," Working Papers 16-13, NET Institute.
    5. David Besanko & Ulrich Doraszelski & Yaroslav Kryukov, 2017. "How Efficient is Dynamic Competition? The Case of Price as Investment," NBER Working Papers 23829, National Bureau of Economic Research, Inc.
    6. MANTA, Otilia Elena, 2017. "European Policy On Increasing The Competitiveness Of The Financial Industry, A Key Factor For Job Creation," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 4(1), pages 217-227.
    7. Basaure, Arturo & Suomi, Henna & Hämmäinen, Heikki, 2014. "Effects of transaction and switching costs on mobile market performance," 20th ITS Biennial Conference, Rio de Janeiro 2014: The Net and the Internet - Emerging Markets and Policies 106830, International Telecommunications Society (ITS).
    8. Yaroslav Kryukov & Ulrich Doraszelski & David Besanko, 2015. "Is Dynamic Competition Socially Beneficial? The Case of Price as Investment," 2015 Meeting Papers 296, Society for Economic Dynamics.
    9. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
    10. Doraszelski, Ulrich & Besanko, David & Kryukov, Yaroslav, 2017. "How Efficient is Dynamic Competition? The Case of Price as Investment," CEPR Discussion Papers 12279, C.E.P.R. Discussion Papers.
    11. Otilia MANTA, 2018. "Trends In The Concept Of The Financial Market In The Current Context Of Globalization," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 3(4), pages 114-124.
    12. 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.
    13. Daniel Björkegren, 2022. "Competition in network industries: Evidence from the Rwandan mobile phone network," RAND Journal of Economics, RAND Corporation, vol. 53(1), pages 200-225, March.
    14. Basaure, Arturo & Vesselkov, Alexandr, 2018. "Internet of things (IoT) platform competition: consumer switching versus provider multihoming," 22nd ITS Biennial Conference, Seoul 2018. Beyond the boundaries: Challenges for business, policy and society 190352, International Telecommunications Society (ITS).
    15. Chen, Jiawei, 2018. "Switching costs and network compatibility," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 1-30.
    16. Weiergräber, Stefan, 2014. "Network Effects and Switching Costs in the US Wireless Industry," Discussion Papers in Economics 25094, University of Munich, Department of Economics.

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