Two Kinds of Consumer Switching Costs

Nilssen, Tore

doi:10.2307/2555907

Cited by 128 publications

(54 citation statements)

References 4 publications

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“…Similarly, Nilssen (1992) observes that if each rm can charge a di erent price to each consumer, there will be no actual switching. Nilssen showed that transactional switching costs give consumers less incentives to switch than do learning switching costs.…”

Section: Paying Consumers To Switchmentioning

confidence: 99%

Coordination and Lock-In: Competition with Switching Costs and Network Effects

2006

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PRELIMINARY DRAFT: PLEASE SEND COMMENTSKEYWORDS: switching costs, network e ects, lock-in, network externalities, co-ordination, indirect network e ects JEL CLASSIFICATIONS: L130 market structure, rm strategy and market performance: oligopoly and other imperfect markets; monopolistic competition; contestable markets L150 information and product quality; standardization and compatibility L120 market structure, rm strategy and market performance: monopoly L140 transactional relationships: contracts and reputation: networks D430 market structure and pricing: oligopoly and other forms of market imperfection D420 market structure and pricing: monopoly. ACKNOWLEDGMENTS: We're grateful to many friends and colleagues for numerous helpful suggestions and comments over several substantial rewrites of this paper since our rst 1997 draft. Special thanks are due to Alan Beggs, Simon AbstractSwitching costs and network e ects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in e ciency, and gives vendors lucrative ex post market power|over the same buyer in the case of switching costs (or brand loyalty), or over others with network e ects.Firms compete ex ante for this ex post power, using penetration pricing, introductory o ers, and price wars. Such \competition for the market" or \life-cycle competition" can adequately replace ordinary compatible competition, and can even be ercer than compatible competition by weakening di erentiation. More often, however, incompatible competition not only involves direct e ciency losses but also softens competition and magni es incumbency advantages. With network e ects, established rms have little incentive to o er better deals when buyers' and complementors' expectations hinge on non-e ciency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive o ers and random events, it later \tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another's existing customers, and so also discourage more aggressive entry.Because of these competitive e ects, even ine cient incompatible competition is often more pro table than compatible competition, especially for dominant rms with installed-base or expectational advantages. Thus rms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.

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Section: Paying Consumers To Switchmentioning

confidence: 99%

Coordination and Lock-In: Competition with Switching Costs and Network Effects

2006

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“…In both models switching costs make the second period less competitive than a market without switching costs. In the first period of both models, prices can be either higher or 9 There are also switching costs models that consider third-degree price discrimination (see Chen (1997), Nilssen (1992 and Taylor (1999)) and endogenous creation of switching costs (see Caminal and Matutes (1990)). The search costs and network externalities literature are also related.…”

Section: Switching Costs Literaturementioning

confidence: 99%

Do Switching Costs Make Markets More or Less Competitive?: The Case of 800-Number Portability

Viard

2004

SSRN Journal

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Do switching costs reduce or intensify price competition in markets where firms charge the same price to old and new consumers? Theoretically, the answer could be either "yes" or "no," due to two opposing incentives in firms' pricing decisions. The firm would like to charge a higher price to previous purchasers who are "locked-in" and a lower price to unattached consumers who offer higher future profitability. The net effect relative to a market without switching costs will depend on the mix of old and new consumers and the relative strength of these two effects. I demonstrate this ambiguity in an infinite-horizon theoretical model that, in contrast to previous models, allows for actual switching in equilibrium. This is necessary to understand markets where consumers actually switch because the real costs of switching are shared between firms and those who switch. 800-(toll-free) number portability provides empirical evidence to answer this question. Before portability, a customer had to change numbers to change service providers. This imposed significant switching costs on users, who generally invested heavily to publicize these numbers. In May 1993 a new database made 800-numbers portable. This inter-temporal drop in switching costs and regulations that precluded price discrimination between old and new consumers provide an empirical test of switching costs' effect on price competition.I use contracts for virtual private network (VPN) services to test how AT&T adjusted its prices for toll-free services in response to portability. Preliminarily (awaiting completion of marginal cost and switching frequency data collection), I find that AT&T reduced margins under VPN contracts that included toll-free usage as the portability date approached, implying that the switching costs due to non-portability made the market less competitive. Contracts which did not include toll-free services and contracts written after portability act as a control group since they were unaffected by portability. These results suggest that, despite toll-free services growing rapidly during this time period, AT&T's incentive to charge a higher price to "locked-in" consumers exceeded its incentive to capture new consumers in the high switching costs era of non-portability.

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“…With the exception of Nilssen (1992) and Taylor (1998), who allow for an arbitrary number of periods, much of the literature looks at two-period models in which consumers purchase one unit of a product each period. In these models, consumers' purchases in the rst period reveal their preferences and determine market shares at the start of the second period; in the second period rms can choose to offer discounts to either their own or their rival's rst-period customers.…”

Section: Game Formmentioning

confidence: 99%

“…For example, the switching costs associated with changing long-distance phone carriers may be different from the switching costs associated with having to learn a new software package. See Klemperer (1987) and Nilssen (1992) for more on this distinction.…”

Section: Introductionmentioning

confidence: 99%