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Product innovation when consumers have switching costs

Author

Listed:
  • Evens Salies

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract
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 firstmover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, which 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.

Suggested Citation

  • Evens Salies, 2011. "Product innovation when consumers have switching costs," SciencePo Working papers Main hal-01069477, HAL.
    • Handle: RePEc:hal:spmain:hal-01069477
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01069477
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    File URL: https://hal-sciencespo.archives-ouvertes.fr/hal-01069477/document
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    References listed on IDEAS

    as
    1. Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated ?," SciencePo Working papers Main hal-00973051, HAL.
    2. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    3. Claude Ménard & Michel Ghertman, 2009. "Regulation, Deregulation and Reregulation: Institutional Perspectives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00496216, HAL.
    4. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
    5. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    6. Krafft, Jackie & Salies, Evens, 2008. "The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case," Research Policy, Elsevier, vol. 37(4), pages 706-719, May.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    8. Morgan, Robert M. & Hunt, Shelby, 1999. "Relationship-Based Competitive Advantage: The Role of Relationship Marketing in Marketing Strategy," Journal of Business Research, Elsevier, vol. 46(3), pages 281-290, November.
    9. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    10. Jackie Krafft & Evens Salies, 2009. "Why and How Should New Industries with High Consumer Switching Costs be Regulated? The Case of Broadband Internet in France," Chapters, in: Claude Ménard & Michel Ghertman (ed.), Regulation, Deregulation, Reregulation, chapter 14, Edward Elgar Publishing.
    11. Waterson, Michael, 2003. "Consumers and Competition," Economic Research Papers 269563, University of Warwick - Department of Economics.
    12. Varadarajan, Rajan, 2009. "Fortune at the bottom of the innovation pyramid: The strategic logic of incremental innovations," Business Horizons, Elsevier, vol. 52(1), pages 21-29.
    13. Pankaj Ghemawat, 1991. "Market Incumbency and Technological Inertia," Marketing Science, INFORMS, vol. 10(2), pages 161-171.
    14. Mueller, Dennis C., 1997. "First-mover advantages and path dependence," International Journal of Industrial Organization, Elsevier, vol. 15(6), pages 827-850, October.
    15. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
    16. Beggs, Alan, 1989. "A Note on Switching Costs and Technology Choice," Journal of Industrial Economics, Wiley Blackwell, vol. 37(4), pages 437-440, June.
    17. Bhattacharyya, Sugato & Nanda, Vikram, 2000. "Client Discretion, Switching Costs, and Financial Innovation," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1101-1127.
    18. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
    19. Waterson, Michael, 2003. "The role of consumers in competition and competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 129-150, February.
    20. Heiko A. Gerlach, 2004. "Announcement, Entry, and Preemption When Consumers Have Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 184-202, Spring.
    21. Pae, Jae H. & Hyun, Jung Suk, 2006. "Technology advancement strategy on patronage decisions: the role of switching costs in high-technology markets," Omega, Elsevier, vol. 34(1), pages 19-27, January.
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    Cited by:

    1. Singh, Nirvikar, 2015. "Punjab’s Agricultural Innovation Challenge," Santa Cruz Department of Economics, Working Paper Series qt4716p3vr, Department of Economics, UC Santa Cruz.

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    More about this item

    Keywords

    Consumer switching costs; Search costs; Product innovation; Competition policy; History of economic thought;
    All these keywords.

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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