Classroom Companion: Business

12.5 · Network Effects and Lock-In Cycle

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12.6 
 Lock-In and Market Regulations
One of the most important aspects of market regulation is to reduce the lock-in 
capabilities of service providers to enhance competition. Examples of such regula-
tions include:
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Forbidding binding time for subscriptions (e.g., in telecommunications)
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Prohibiting loss of advantages (e.g., in insurance)
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Obligating number portability in telecommunications
The last item may require some explanation. Both fixed and mobile telephone 
numbers have historically uniquely identified both the operator and the subscriber 
Fig. 12.3 The original DVORAK keyboard layout. (Source: Public domain, 
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https://en. wikipedia. org/wiki/Dvorak_keyboard_layout#/media/File:KB_
United_States_Dvorak. svg
)
Fig. 12.2 The original QWERTY layout (By C.L. Sholes - U.S. Patent No. 207,559, 
Public Domain). Note that the “0” and “1” is intentionally missing to simplify 
design. The “0” can be reproduced as a “O,” while a “1” can be reproduced as an 
“l” or an “I.” (Source: Public Domain, 
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https://en. wikipedia. org/wiki/
QWERTY#/media/File:QWERTY_1878. png
)
 
Chapter 12 · Lock-In and Switching Costs

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connected to the network. If there is more than one telephone operator in a coun-
try, each operator is, therefore, assigned different series of national telephone num-
bers. In this regime, the subscriber will get a new telephone number if he or she 
moves the subscription from one operator to another. This is inconvenient for the 
subscriber and causes lock-in since it may entail that hundreds of friends and other 
contacts must be updated about the new number. To avoid this type of lock-in, the 
regulatory authorities in several countries introduced number portability as a man-
datory requirement around 2000. This implies that the subscriber keeps the same 
number if the subscription is moved to another operator. The networks must then 
be updated with facilities that route the calls to new destinations without any 
involvement of the users of the telephone network.
In telecommunications, some providers, particularly, incumbent or dominating 
operators, are facing a particular form of lock-in, namely, that they must continue 
to offer network services long after these services have ceased to be profitable. This 
is usually a public duty enforced by the authorities. Network providers must, for 
example, still offer fix telephone services even though more and more of the users 
are switching to mobile phones as their only telephone subscription, and mobile 
network operators must still support GSM even though they offer full national 
coverage with 4G technology.
.
Table 
12.1
summarizes how regulation can be applied to avoid lock-in and 
undesirable market behavior. The effect of the switching barriers is also indicated 
in terms of two broad categories:
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Economical barrier implies that there are considerable economic expenses asso-
ciated with crossing the barrier.
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Psychological barrier implies that the major switching cost is associated with 
lack of knowledge of the outcome of the switching, for example, fear for losing 
information built up over time.
In some cases, it is impossible to regulate the market such that the switching barri-
ers disappear, for example, expenses associated with spare parts, training, possible 
loss of information, and equipment lifetime. In other cases, switching costs may be 
reduced or eliminated by appropriate regulations.
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Termination of contracts without any expenses or inconveniences for the cus-
tomer is in many cases made compulsory by regulations, for example, forbid-
ding or limiting the use of SIM lock or requiring that advantages gained as 
customers are transferrable to new providers (e.g., in the insurance business).
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Bundling of services is also regulated in several countries. One case is associated 
with incumbents, that is, operators that were state monopolies before the gen-
eral liberalization of telecommunications in 1998. To avoid that the incumbents 
misuse their market power, restrictions may be put on how these companies 
bundle their services in subscription packages, for example, combining tele-
phony, Internet, mobile phone, and television in one subscription and thereby 
capturing all the individual markets. The physical connection, called the” local 
loop,” from the subscriber to the local exchange is usually owned by the incum-
bent. To allow other operators to access the subscribers without digging new 
cable ducts, the market regulations require that the incumbent allowed other