Classroom Companion: Business

12

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12.4 
 Lock-In Cycle – 185
12.5 
 Network Effects
and Lock-In Cycle – 186
12.6 
 Lock-In and Market
Regulations – 188
12.7 
 Conclusions – 191
 References – 192

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179
12
 
n Learning Objectives
After completing this chapter, you should be able to:
5
Identify and classify lock-in mechanisms associated with a digital technology or 
service.
5
Explain how network effects may cause lock-in and sometimes also winner-
takes-all situations.
5
Identify whether or not lock-in effects can be eliminated by market regulations.
12.1 
 Introduction
7
Chapter 
9
 explains why network effects may cause lock-in in certain markets, 
and 
7
Chap. 
11
illustrates how path dependence generated by network effects may 
drive the market into such states. This chapter considers more closely mechanism 
that can be deployed to acquire and maintain lock-in.
Definition 12.1 Lock-In
Lock-in incorporates all mechanisms that a company may use to keep its customers 
by establishing barriers to prevent customers to switch to another supplier. This is 
referred to as vendor lock-in (focusing on the vendor instigating lock-in), customer 
lock-in (focusing on the customer being locked in), or proprietary lock-in (focusing 
on the product or service into which lock-in takes place).
We will use the term lock-in for all three terms since they only display different 
perspectives of the same phenomenon.
Acquiring new customers is expensive since it often involves intensive market-
ing and expensive price campaigns. Therefore, the vendor must do whatever is pos-
sible to keep the customers. Churning is defined to be the act that a customer 
abandons the service offered by one provider for a competing service offered by 
another provider. Vendors want to reduce churning as much as possible by exploit-
ing various lock-in mechanisms, for example, by making it expensive or inconve-
nient for users to switch to other suppliers.
Note that lock-in may lead to de facto monopolies such as in the standards war 
between Betamax and VHS (see 
7
Chap. 
11
). Lock-in combined with path depen-
dence is also the reason why Facebook, and not Myspace, became the leading 
social networking medium on Internet. The wisdom is that the level of lock-in for 
a digital service significantly influences the evolution of market shares, competi-
tion, and formation of monopolies.