Switching Costs in Two-sided Markets - Ecares

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may result in a decrease in overall profit as switching costs increase. 7 More interestingis that here identifies additional channels which may make overall profit decreases inswitching costs. In particular, network externality and naivete make it more likely thatswitching costs lower first-period equilibrium prices, and hence reducing overall profits.4 ExtensionsThe analysis so far is based on a single-homing model, but this is not the only marketconfiguration in reality. There are various ways to extend the model, for instance, onemay consider the case where one group single-homes while the other group may join eitherone platform or both (commonly termed as “competitive bottlenecks” because eachplatform has exclusive market power over the multi-homing consumers), the two groupsof consumers bear different switching costs, and the two platforms are asymmetric. I willsketch these extensions in turn, but leave the full-scale analysis of them for a separatestudy.4.1 Competitive BottlenecksSuppose that side A continues to single-home, while side B may multi-home (or not). 8Competitive bottleneck framework is typical in, for instance, the computer operatingsystem market (users use a single OS, Windows, Mac or Linux, while engineers developsoftware for different OS), and online air ticket or hotel bookings (consumers use onecomparison site such as skyscanner.com, lastminute.com or booking.com, but airlinesand hotels join multiple platforms in order to gain access to each comparison site’sconsumers). Since side B can choose both platforms, switching costs and loyalty onthis side are not relevant (s B , µ B = 0). 9 The main difference from the single-homingmodel lies in the market share of side-B consumers, which can be described as follows.A consumer from this group is indifferent between buying and not buying from platform0 ifv B + e B n A 0,2 − x − p B 0,2 = 0,which can be simplified ton B 0,2 = x = v B + e B n A 0,2 − p B 0,2.7 See for instance Klemperer (1987a).8 Side B does not necessarily universally multi-home.9 Note that the concept of multi-homing is not compatible with switching costs in the current framework.As an example, think of the smartphone market. If the option to multi-home means consumersare able to use both iPhone and Android systems, then it is not reasonable to impose an additionallearning cost on them if they switch platform. Another example is the media market. If multi-homingmeans that advertisers are free to put ads on platform A, B or both, then it does not make sense toimpose a switching cost on advertisers who buy ads on one platform only. Even if we distinguish betweenlearning switching costs (incurred only at a switch to a new supplier) and transactional switching costs(incurred at every switch), as in Nilssen (1992), switching cost is still not relevant on the multi-homingside because transaction costs and learning costs are equivalent in a two-period model, where consumersswitch only once. This also explains why it is not useful to consider the case where both sides multi-homewithin this framework.16
Similarly, a side-B consumer is indifferent between buying and not buying from platform1 ifv B + e B (1 − n A 0,2) − (1 − x) − p B 1,2 = 0,which can be reduced ton B 1,2 = 1 − x = v B + e B (1 − n A 0,2) − p B 1,2.We solve the game by backward induction as before. To simplify the exposition, wefocus on the special case where e A = e B = e, µ A = 0, and δ A = δ B = δ F = δ. Considerthe symmetric equilibrium. We find the following first-period equilibrium prices:p A 0,1 =1 + δs A3 − e2 − v B2 − 2δs2 A (3e2 − 2)3(1 − e 2 ,)p B 0,1 = v B2 .Differentiating p A 0,1 with respect to s A, we obtainProposition 7. In the two-period two-sided multi-homing duopoly model, where oneside of the consumers multi-homes, while the other side single-homes, each side exertsthe same external benefit on the other side, all consumers’ preferences are independentover time, and they are equally patient as the platforms,i. For the group of consumers who bear switching costs,• If network externality is sufficiently weak, then the first-period equilibriumprice paid by them always increases in switching costs.• If network externality is sufficiently strong, then the relationship between thefirst-period equilibrium price paid by them and switching costs is inverted U-shaped.ii. If the market is fully covered, then prices tend to be higher on the side that multihomes,and lower on the side that single-homes.See Appendix E for the proof.(i) implies that strong externality makes it more likely that first-period equilibriumprices decrease in switching costs, which is consistent with Proposition 5. However,(ii) is different from the single-homing model. Since side B multi-homes, there is nocompetition between the two platforms to attract this group. The high prices faced bythe multi-homing side is a consequence of each platform having monopoly power overthis side, and the large revenues are used in the form of lower prices to convince thesingle-homing side to join the platform.Before, in the single-homing model welfare analysis is not meaningful: welfare isalways the same because all consumers buy one unit of good, the size of the two groupsis fixed, and the whole market is served. It ignores the possible demand-expansion and17
Page 6: This equation shows that the number
Page 11 and 12: Consider the symmetric equilibrium
Page 13 and 14: 3.4 Switching Costs, One-sided Mark
Page 15: 3.6 Heterogeneous ConsumersI now tu
Page 19 and 20: same procedures, and focusing on th
Page 21 and 22: AppendicesA Proof of Proposition 3T
Page 23 and 24: E Proof of Proposition 7For part (i

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