Reimbursing Consumers' Switching Costs in Network and Nonnetwork Industries

ABSTRACT To analyze how firms' policies to reimburse consumer switching costs affect prices, market structure, and welfare, we develop a dynamic duopoly model with network effects, switching costs, and switching cost reimbursement. We find that each firm's reimbursement strategy is nonmonotonic in its installed base. While nonmonotonic, the firm with the greater installed base always reimburses more of the switching cost than its smaller competitor, allowing the firm that obtains an early advantage to dominate the market. Consumers benefit from the reimbursement, while producers only benefit in network industries when network effects are large; otherwise, the reimbursement induces a prisoner's dilemma.

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Publication Details

Journal
Journal of Economics & Management Strategy
Published
2025-04-23
DOI
https://doi.org/10.1111/jems.12635
Citations
2
Primary Topic
Digital Platforms and Economics
Type
article
Field-Weighted Citation Impact
4.45
Controls
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article

Reimbursing Consumers' Switching Costs in Network and Nonnetwork Industries

Michael D. Sacks, Jiawei Chen
2 citations
Journal of Economics & Management Strategy
Digital Platforms and Economics
4.45
article

Reimbursing Consumers' Switching Costs in Network and Nonnetwork Industries

Michael D. Sacks, Jiawei Chen
article en
2 citations

Abstract

ABSTRACT To analyze how firms' policies to reimburse consumer switching costs affect prices, market structure, and welfare, we develop a dynamic duopoly model with network effects, switching costs, and switching cost reimbursement. We find that each firm's reimbursement strategy is nonmonotonic in its installed base. While nonmonotonic, the firm with the greater installed base always reimburses more of the switching cost than its smaller competitor, allowing the firm that obtains an early advantage to dominate the market. Consumers benefit from the reimbursement, while producers only benefit in network industries when network effects are large; otherwise, the reimbursement induces a prisoner's dilemma.

Journal of Economics & Management StrategyVol. 35(1)
Clarkson University (US), University of California, Irvine (US)
Openalex Percentile: Top 6%
Digital Platforms and Economics
4.45
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