Classroom Companion: Business

12.1 · Introduction

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12.2 
 Switching Costs
Definition 12.2 Switching Costs
Switching costs are the direct and indirect costs for suppliers to capture customers 
from a competitor (vendor switching costs) and for a customer to switch to a new 
supplier of a good or service (consumer switching costs). The total switching cost is 
the sum of the cost for the supplier and the cost for the customer.
If the vendor’s switching cost is V and the customer’s switching cost is C, then the 
total switching cost is S = V + C.
For the vendor, there are two strategies (Amarsy, 
2015
):
1. To capture new customers, the vendor must make the switching cost for poten-
tially new consumers as small as possible. In practice, this means that the ven-
dor must compensate for expenses or inconveniences the customer may have for 
swapping supplier. This makes the switching costs for the vendor high.
2. On the other hand, the vendor must make the switching cost as high as possible 
for its own customer to discourage them from switching to a competitor. The 
switching costs should be so high that competitors are discouraged from trying 
to capture the customer.
In oligopolies, this may sometimes cause conflicting strategies, particularly, if the 
switching costs are purely monetary as illustrated in 
7
Example 
12.1
.
 
► Example 12.1 Competition in the Mobile Phone Market
Until about 2010, it was common for mobile operators to sell mobile phones to new cus-
tomers for a much lower price than the actual market price for mobile phones to capture 
new customers. This reduced the switching costs for the consumer but increased them 
for the supplier. The total switching cost was unchanged. Since the mobile market is an 
oligopoly, the mobile operators were forced to play a prisoner’s dilemma game, in which 
all suppliers were compelled to use the same pricing strategy (see 
7
Chap. 
13
 where 
prisoner’s dilemma is explained). If not, they would capture fewer new customers, and 
the cost for own customers to switch to a competitor would be small. When the market 
for smartphones approached saturation, this practice was terminated, and the consum-
ers had to pay the market price for smartphones. One reason for the new strategy was, of 
cause, that the operators had realized that subsidizing the phones was a bad strategy in 
markets that were saturated, as the mobile market in Europe had become at that time. In 
an oligopoly market where there are few new customers to capture, this strategy will not 
stimulate growth. The strategy will reduce the expenses of the customers but increase the 
costs and reduce the revenues of the mobile operators.
◄
The switching cost for the consumer is composed of several elements such as fees 
for terminating a subscription (now mostly nonexistent because of market regula-
tion), lost advantages (conditional savings and discounts), additional work (instal-
lation and training of staff), possible loss of information (incompatible formats),