Singh_Econ139A_S2011 - Switching Costs Lock-In business technology society B2B E-Commerce The Economics of Electronic Commerce(Economics 139A UCSC

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1 business. technology. society. Switching Costs, Lock-In, B2B E-Commerce The Economics of Electronic Commerce (Economics 139A) UCSC Spring 2011 Professor Nirvikar Singh May 27, 2011
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Competition Reductions in transportation and communications costs increase competition Product differentiation (including customization and personalization) helps to combat this trend Increasing customer switching costs also counteracts increased competition If switching costs are high enough, the customer is ‘locked in’
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Switching Costs and Sources of Lock-In 1. Contractual commitments 2. Durable purchases 3. Product-specific training 4. Information and databases 5. Specialized suppliers 6. Search costs 7. Loyalty programs
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Network Effects Connectivity of physical network is not an issue What matters is the various virtual subnetworks formed by communities of users The value of the network to any individual member depends positively on the total number of members of the network Metcalfe’s ‘Law’ -- the value of a network is proportional to the square of the number of users With n members of the network, the number of possible interactions is n(n - 1)/2
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Network Effects n is the marginal value for everyone (those already there as well as the new person) of another user joining the network – a positive externality So marginal value increases as network size increases -- economies of scale (demand side) Raises individual switching costs, since the cost of switching reflects the size of the network Switching costs go down if enough people switch together
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Innovation with Network Effects An innovator may need to engineer a collective switch to make inroads into an incumbent’s network Incumbent’s network may be large not only because of the network effects, but also because of supply side economies of scale Billion dollar question: Are network externalities and scale economies in e-commerce strong enough to lead to market dominance by single firms?
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Competition and Networks Virtual networks of consumers are created in
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This note was uploaded on 09/09/2011 for the course ECON 139a taught by Professor Turnbull,s during the Spring '08 term at University of California, Santa Cruz.

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Singh_Econ139A_S2011 - Switching Costs Lock-In business technology society B2B E-Commerce The Economics of Electronic Commerce(Economics 139A UCSC

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