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Switching Costs and Dynamic Price Competition in Network Industries

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Abstract

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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  • Jiawei Chen, 2009. "Switching Costs and Dynamic Price Competition in Network Industries," Working Papers 09-25, NET Institute, revised Apr 2010.
    • Handle: RePEc:net:wpaper:0925
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    Cited by:

    1. Timothy Keller & David Miller & Xiahua (Anny) Wei, 2010. "A Steady State Approach to a Network Externality Market With Switching Costs," Working Papers 10-19, NET Institute.

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    Keywords

    Switching Costs; Network Effects; Dynamic Oligopoly; Market Dominance; Pricing;
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