Switching Costs in Two-sided Markets

Abstract

This paper studies a dynamic two-sided market in which consumers face switching costs between competing products. I first show that, in a symmetric equilibrium, switching costs lower the first-period price if network externalities are strong. By contrast, switching costs soften price competition in the initial period if network externalities are weak and consumers are more patient than the platforms. Second, an increase in switching costs on one side decreases the first-period price on the other side. Finally, consumer heterogeneity such as the presence of more loyal and naive customers on one side intensifies first-period competition on this side but softens first-period competition on the other side.

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Reference

Wing Man Wynne Lam, “Switching Costs in Two-sided Markets”, TSE Working Paper, n. 14-517, August 2014.