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Switching Costs in Two-sided Markets

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  • Lam, Wing Man Wynne
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    This paper studies a dynamic two-sided market in which consumers face switching costs between competing products. I first show that, in a symmetric equilibrium, switching costs lower the first-period price if network externalities are strong. By contrast, switching costs soften price competition in the initial period if network externalities are weak and consumers are more patient than the platforms. Second, an increase in switching costs on one side decreases the first-period price on the other side. Finally, consumer heterogeneity such as the presence of more loyal and naive customers on one side intensifies first-period competition on this side but softens first-period competition on the other side.

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    File URL: http://www.tse-fr.eu/sites/default/files/medias/doc/wp/io/wp_tse_517.pdf
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    Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 14-517.

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    Date of creation: Aug 2014
    Handle: RePEc:tse:wpaper:28398
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    1. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    2. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    3. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    4. 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.
    5. Paulo Somaini & Liran Einav, 2013. "A Model of Market Power in Customer Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 61(4), pages 938-986, December.
    6. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
    7. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    8. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
    9. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    10. Severin Borenstein & Jeffrey K. Mackie-Mason & Janet S. Netz, 2000. "Exercising Market Power in Proprietary Aftermarkets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 157-188, 06.
    11. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
    12. Gabszewicz, Jean & Pepall, Lynne & Thisse, Jacques-Francois, 1992. "Sequential Entry with Brand Loyalty Caused by Consumer Learning-by-Using," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 397-416, December.
    13. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-246, Summer.
    14. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
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