Coordination and Lock-In:Competition with Switching Costs
and Network E¤ectsPart IV of IV Conclusion and References
December 2004the latest version of this paper, and related material, will be at
www.paulklemperer.org
Joseph FarrellUniversity of California, Berkeley
549 Evans Hall # 3880Berkeley, CA 94720-3880
USA
email: [email protected]
and
Paul KlempererNu¢ eld College, Oxford University
Oxford OX1 1NFEngland
Int Tel: +44 1865 278588
email: [email protected]
First draft: 1997This draft: 2004
PRELIMINARY DRAFT: PLEASE SEND COMMENTS
c Joseph Farrell and Paul Klemperer, 2004
1
1 Introduction
2 Switching Costs and Competition
3 Network E¤ects and Competition
4 Conclusion
Switching costs and network e¤ects create fascinating market dynamics andstrategic opportunities. They link trades that are not readily controlled bythe same contract: future trades in the case of switching costs, and tradesbetween the seller and other buyers in the case of network e¤ects. Wehave stressed that the result can be e¢ cient competition for larger units ofbusiness ��competition for the market�. Thus neither switching costs nornetwork e¤ects are inherently and necessarily problematic. But they veryoften make competition, perhaps especially entry, less e¤ective. So we favorcautiously pro-compatibility public policy. And policymakers should lookparticularly carefully at markets where incompatibility is strategically chosenrather than inevitable.
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