Master Thesis

Title: Consumer Lock-in Caused by Switching Costs and Network Effects

Abstract

Historically small events have an immense inpact on adoption processes. As a result of this an entire industry may end up being locked in to one particular good, service or technology. Lock-in may occur, because of switching costs, network effects or buyers' miscoordination. By modeling consumers' choice in the presence of switching costs and network effects I found, that welfare is greater under large scale entry equilibrium, than under no entry equilibrium and also, that high switching costs can deter even efficient entry thus lock-in consumers to an inefficient firm's good, service or technology. In the switching cost literature the ambiguity of the welfare effects of switching costs allows me to say, that competition law and competition policy makers should evaluate cases in which firms choose to have swtiching costs under rule of reason rather, than per se (il)legality.

JEL Classiffication: C72, D11, D43, D85, L14

Keywords: Lock-in, Path dependence, Switching costs, Network effects, Coordination

Acknowledgement: I am grateful to Joan de Martí who has given me useful advices and comments, particularly his help was central during the model building period. Naturally, I am responsible for all the remaining errors.