Slides6_Lockin

Slides6_Lockin - The Information Economy Switching Costs...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
The Information Economy Switching Costs and Lock-in 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Switching costs 2 Switching costs are ubiquitous Between brands (e.g. credit card companies) Between technologies (e.g. operating systems) Example: Bell Atlantic and AT&T In mid-1980s Bell invest in $3bn of AT&T switches Proprietary technology, so needed AT&T for upgrades and fixes Introducing„888‟ numbers cost Bell $8m for software Annual upgrades cost $100m/year plus peripheral sales Other examples Changing cell phone providers Changing server software Changing email address, internet service provider, phone company…
Background image of page 2
On switching costs 3 Switching costs are two-sided Customer switching costs: searching for new firm, learning new system, losing complementary investments etc. Firm switching costs: setting up new account, hiring personnel Total switching cost matters. Switching costs can be endogenous Depend on compatibility decisions (e.g. number portability). Can impose costs on departing customers (e.g. disruption) Lock-in also faced by suppliers Supplier lock-in: iPhone app maker and Apple. Two-sided lock-in: coal mine and electricity plant
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Why switching costs matter I 4 The Valuation Principle: In homogenous good market, the discounted present value of a customer to firm = customers total switching costs. Model Competitive market has price p m =c Firm A has N loyal customers with one-off switching cost k Time t {1,2,…} with discount rate . Customer willing to pay p=c+k(1- ), otherwise will quit. This means profits equal π =kN. Hence switching costs tell you how much firm is worth Ignoring differentiation and costs differences.
Background image of page 4
5 How much should you invest in installed customer base? Promotions to acquire customers Bribing customers to join you (e.g. credit cards) Idea: Firm A is trying to lure a new customer Suppose customer worth $100 to A (this might be the customer‟s switching cost after moving to A) Customer switching cost from competitor $50 Cost to Firm A of customer switching $25 Firm A can give customer $55 discount, and make $20 profit. Other decisions affect levels of switching costs
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 23

Slides6_Lockin - The Information Economy Switching Costs...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online