Salies, Evens (2010): Product innovation when consumers have switching costs.
Download (113kB) | Preview
Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with first-mover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, that must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.
|Item Type:||MPRA Paper|
|Original Title:||Product innovation when consumers have switching costs|
|Keywords:||Consumer switching costs; Search costs; Product innovation; Competition policy; Economic methodology|
|Subjects:||L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks
L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L96 - Telecommunications
B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B21 - Microeconomics
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy ; Sectoral Planning Methods
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness
D - Microeconomics > D4 - Market Structure, Pricing, and Design
|Depositing User:||Evens Salies|
|Date Deposited:||22 Feb 2011 21:08|
|Last Modified:||03 Mar 2017 10:38|
Bhattacharyya, S., Nanda, V., 2000, Client discretion, switching costs, and financial innovation, The Review of Financial Studies, Vol. 13, No. 4, pp. 1101—1127.
Baumol, J.W., 2006, Entrepreneurship and innovation: (Micro)Theory of price and profit. ISS Conference, Innovation, Competition and Growth: Schumpeterian Perspectives, Nice – Sophia Antipolis, 21—24 June 2006.
Baumol, W.J., 2002, The Free-Market Innovation Machine – Analyzing the Growth Miracle of Capitalism, Princeton University Press: Princeton.
Beggs, A., 1989, A note on switching costs and technology choice, The Journal of Industrial Economics, Vol. 37, No 4, 437—440.
Chen, P.-Yu, Forman, C., 2006, Can vendors influence switching costs and compatibility in an environment with open standards?, MIS Quarterly, Vol. 30, Special Issue on Standard Making, 541—562.
Chen, P.-Yu, Hitt, L.M., 2006, Information technology and switching costs, in T. Hendershott (ed.), Information Systems Outsourcing: Enduring Themes, Global Challenges, and Process Opportunities, 437—470, Elsevier, Amsterdam.
Coase, R.H., 1937, The nature of the firm, Economica, Vol. 4, No. 16, pp. 386—405.
Farrell, J., Klemperer, P., 2007, Coordination and lock-in: competition with switching costs and network effects, in Handbook of Industrial Organization, Ch. 31, 1968—2072, North-Holland.
Farrell, J., Shapiro, C., 1988, Dynamic competition with switching costs, Rand Journal of Economics, Vol. 19, No. 1, 123—137.
Ghemawat, P., 1991, Market incumbency and technological inertia, Marketing Sciences, Vol. 10, No. 3, 161—171.
Gerlach, H.A., 2004, Announcement, entry, and pre-emption when consumers have switching costs, Rand Journal of Economics, Vol. 35, No. 1, 184—202.
Gourville, J.T., 2004, April, Why consumers don’t buy: the psychology of new-product adoption, Harvard Business School Note, No. 504-056.
Klemperer, P., 2008, Switching Costs, The New Palgrave Dictionary of Economics, 2nd edition, Durlauf, S.N., Blume, L.E. (eds), Palgrave, MacMillan, This version: March 2005, available at http://www.nuff.ox.ac.uk/users/klemperer/NewPalgrave.pdf.
Klemperer, P., 1995, Competition when consumers have switching costs: an overview with applications to industrial organization, macroeconomics, and international trade, Review of Economic Studies, Vol. 62, No. 4, 515—539.
Klemperer, P., 1987, The competitiveness of markets with switching costs, Rand Journal of Economics, Vol. 18, No. 1, 138—150.
Klemperer, P., Padilla, J., 1997, Do firms’ product lines include too many varieties? Rand Journal of Economics, Vol. 28, No. 3, 472—488.
Krafft, J., Salies, E., 2009, Why and how should new industries with high consumer switching costs be regulated? The case of broadband Internet in France, Edward Elgar, Advances in New Institutional Analysis, in Regulation, Deregulation, Reregulation: Institutional Perspectives, Ménard, C., Ghertman, M. (eds).
Krafft, J., Salies, E., 2008, The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case, Research Policy, Vol. 37, No. 4, 706—719.
Morgan, R.M., Hunt, S., 1999, Relationship-based competitive advantage: the role of relationship marketing in marketing strategy, Journal of Business Research, Vol. 46, No. 3, 281—290.
Mueller, D.C., 1997, First-mover advantage and path dependence, International Journal of Industrial Organization, Vol. 15, No. 6, 827—850.
Nielson, C.C., 1996, An empirical examination of switching cost investment in business-to-business marketing relationships, The Journal of Business & Industrial Marketing, Vol. 11, No. 6, 38—60.
Pae, J.H., Hyun, J.S., 2006, Technology advancement strategy on patronage decisions: the role of switching costs in high-technology markets, Omega, Vol. 34, No. 1, 19—27.
Schumpeter, J.A., 1942, Monopolistic practices, in Capitalism, Socialism and Democracy, Chapter 8, 1962 for the 3rd Edition, Harper Torchbooks, New York.
Shy, O., 2002, The Economics of Network Industries, Cambridge University Press, 1st edition, Cambridge MA.
Tellis, G.J., 1986, Beyond the many faces of price : an integration of pricing strategies, The Journal of Marketing, Vol. 50, No. 4, pp. 146—160.
Tirole, J., 1988, The Theory of Industrial Organization, The MIT Press, Cambridge: MA. Varadarajan, R., 2009, Fortune at the bottom of the innovation pyramid: the strategic logic of incremental innovations, Business Horizons, Vol. 52, 21—29
Von Weizsäcker, C.C., 1984, The cost of substitution, Econometrica, Vol. 52, No. 5, 1085—1116.
Waterson, M., 2003, The role of consumers in competition and competition policy, International Journal of Industrial Organization, Vol. 21, No. 2, 129—150.