Classroom Companion: Business

 
Chapter 12 · Lock-In and Switching Costs

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hidden costs (additional equipment or functionality not included in the offer), 
inconvenience (updating cooperating systems, customers, or address lists), and sur-
prises (the offer is not as good as promised). Some of the switching costs are direct 
costs (e.g., exit fees, training, or additional equipment), and some are psychologi-
cal, emotional, or social (“the pain of losing an advantage is stronger than the 
pleasure of gaining the same advantage” (Kahneman & Tversky, 
1992
)).
The switching costs for the vendor may be introductory price offers (first month 
free of charge), discounts on equipment (mobile phone for a low price), training 
assistance (free training course for key employees), or free additional features (anti-
virus protection or backup storage).
12.3 
 Lock-In Mechanisms
A company may employ different strategies to lock in its users. Here are some of 
the main strategies (Shapiro & Varian, 
1999
).
12.3.1 
 Spare Parts, System Updates, and Maintenance
Systems where availability and dependability are critically important (e.g., power 
distribution, telecommunications, airlines, and large computer systems), it must be 
easy to obtain spare parts to keep the system up and running. The company may 
have a separate store of spare parts and skilled maintenance personnel, or they 
may have a contract with the equipment manufacturer to supply spare parts and 
repair at short notice. All this costs money. This leads to lock-in for the system 
owner because switching to a new supplier while the existing system is still in oper-
ation means a double set of spare parts (and related maintenance contracts).
12.3.2 
 Training
The situation is much the same as for spare parts. A new system—for example, a 
new type of aircraft—may require extensive training of staff for operations and 
maintenance. The same applies for a change of computer platforms from, for 
example, Microsoft to Mac, in which lock-in mechanisms usually favor Microsoft 
since they have the biggest market share.