Brand Switching Essay

10250 Words Jun 9th, 2013 41 Pages
Estimating Switching Costs in the Mobile Telecommunications Industry in the UK∗
Lukasz Grzybowski Center for Information and Network Economics Munich Graduate School of Economics September 2004

Preliminary version, Comments are welcome
Abstract In this paper I estimate the magnitude of switching costs in the UK mobile industry. Using a survey data with individual choices of network operators in two consecutive years I find a presence of very strong average switching costs, which make the majority of consumers reluctant to switch networks. The size of average switching costs differs significantly across networks and the observed switching may be due to heterogeneous switching costs across consumers. The willingness to switch networks
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An important implication of switching costs is that products, which initially are close technological substitutes may cease to remain economic substitutes. Thus, ex-ante homogeneous products might become heterogeneous after the customers’ purchase. Moreover, the existence of switching costs leads to a change in the strategical environment of firms. Being conscious of switching costs, firms realize that they have more power over their current customers. Thus, in markets with switching costs the firms will adopt aggressive pricing strategies in the early stages of competition in order to build customer base. Once the consumers’ switching costs are established, the firms will charge higher prices to exploit the mature market. Moreover, if any company manages to reach a dominant position in terms of market shares, it becomes difficult for new companies to enter. The most customers would be hesitant to buy the entrant’s product. Thus, switching costs enforce the position of dominant firms, since it less likely for competitors to lure customers away. This gives more market power to the dominant firms allowing them to charge higher prices and increase profits. However, not able

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to differentiate between current and potential customers, they face a trade-off between charging low

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