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Network Effects and Switching Costs in the Market for Routers and Switches

Author

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  • Chris Forman

    (Graduate School of Industrial Administration Carnegie Mellon University)

  • Pei-yu Chen

    (Graduate School of Industrial Administration Carnegie Mellon University)

Abstract

This research examines the impact of switching costs on vendor choice in the market for routers and switches. We show that despite the use of open standards which attempt to enhance interoperabilities for equipments from different vendors, vendors in this market are able to maintain high switching costs. Because routers and switches are networked goods, switching costs may arise from prior investments made at the same establishment and/or at other establishments within the same firm. We study how the introduction of switches into the LAN market affected vendor choice in routers. In particular, we provide evidence of significant cross-product switching costs and sizeable shopping costs when buyers purchase routers and switches simultaneously. However, we also show that the introduction of switches may have temporarily reduced switching costs for router buyers investing in switches.

Suggested Citation

  • Chris Forman & Pei-yu Chen, 2003. "Network Effects and Switching Costs in the Market for Routers and Switches," Working Papers 03-03, NET Institute, revised Oct 2003.
    • Handle: RePEc:net:wpaper:0303
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    References listed on IDEAS

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    Cited by:

    1. László Lörincz & Péter Nagy, 2010. "Switching Costs in Telecommunications: Conclusions from a Hungarian Survey," Chapters, in: Morten Falch & Jan Markendahl (ed.), Promoting New Telecom Infrastructures, chapter 11, Edward Elgar Publishing.
    2. Fabio Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 301-322.
    3. Lukasz Grzybowski & Pedro Pereira, 2011. "Subscription Choices and Switching Costs in Mobile Telephony," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(1), pages 23-42, January.
    4. Atip Asvanund & Karen Clay & Ramayya Krishnan & Michael D. Smith, 2004. "An Empirical Analysis of Network Externalities in Peer-to-Peer Music-Sharing Networks," Information Systems Research, INFORMS, vol. 15(2), pages 155-174, June.
    5. Lukasz Grzybowski, 2008. "Estimating Switching Costs in Mobile Telephony in the UK," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 113-132, June.

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