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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/29501

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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