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http://hdl.handle.net/2451/29501
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| Title: | Switching Costs in Network Industries |
| Authors: | Chen, Jiawei - University of California, Irvine |
| Issue Date: | 2009 |
| Series/Report no.: | Net Institute Working Paper;09-25 |
| Abstract: | In network industries, switching costs have two opposite effects on the
tendency towards market tipping. First, the fat-cat effect makes the
larger firm price less aggressively and lose consumers to the smaller
firm. This effect tends to prevent tipping. Second, the
network-solidifying effect reinforces network effects by making a
network size advantage longer-lasting and hence more valuable, thus
intensifying price competition when networks are of comparable size.
This effect tends to cause tipping. I find that when switching costs are
high, the fat-cat effect dominates and an increase in switching costs
can change the market from a tipping equilibrium to a sharing
equilibrium. When switching costs are low, the network-solidifying
effect dominates and an increase in switching costs can change the
market from a sharing equilibrium to a tipping equilibrium. Policy
intervention to remove switching costs in network industries may
substantially reduce the likelihood of market tipping. |
| URI: | http://hdl.handle.net/2451/29501 |
| Appears in Collections: | NET Institute Working Papers Series
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