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Platform Competition and Endogenous Switching Costs

  • Mark J. TremblayEmail author
Article
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Abstract

This paper considers intra-platform technologies that allow a consumer’s content and preferences to carryover across platform generations. In many platform industries, content consumed on a platform’s previous generation can be used on the platform’s new generation. Naturally, a consumer with more content incurs a greater cost to switch platforms. Instead of discounting the first-period consumer price (the standard result), I find that a platform subsidizes content procurement. This still provides a bargain to first-period consumers in the form of more content, but it also generates a more extensive second-period markup to consumers. To further highlight the usefulness of the model, data from the video game market is used to provide additional insights on consumer primitives and to explain how Sony generated endogenous switching costs which allowed them to dominate the video game market in the early 2000s.

Keywords

Two-sided markets Network externalities Incumbency Entry Consumer lock-in 

JEL Classification

D40 L41 L22 

Notes

Acknowledgments

I thank Yong Chao, Jay Pil Choi, Carl Davidson, Jon Eguia, Thomas D. Jeitschko, Amedeo Piolatto, John D. Wilson, the audiences at Universidad Carlos III de Madrid, McMaster University, Gonzaga University, the University of Queensland, and the participants of the Fourteenth Annual International Industrial Organization Conference, the Seventh Annual Searle Conference on Internet Commerce and Innovation, and the Fourteenth Annual Harvard Business School Open and User Innovation Conference for their helpful comments. This paper was previously circulated as “Dynamic Platform Competition in Two-Sided Markets with Cloud Storage.”

Supplementary material

10842_2019_301_MOESM1_ESM.pdf (408 kb)
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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Farmer School of BusinessMiami UniversityOxfordUSA

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