Classroom Companion: Business

 
Chapter 12 · Lock-In and Switching Costs

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competitor to enter the market. In most cases, the market dominance of the 
existing monopoly is so strong that the newcomer will never grow to become a 
real competitor, or if it starts growing because the network effects are in favor 
of the newcomer, it may capture the whole market and become a new monopoly 
squeezing the old monopoly out of the market.
12.7 
 Conclusions
The key message is that lock-in is common in the digital economy. For vendors, 
there are two strategies:
1. To keep customers by making the switching costs for the customers (barriers to 
leave) as high as possible
2. To capture customers from competitors by making the switching cost for cus-
tomers from competitors (barriers to enter) as small as possible
These strategies may be conflicting, particularly, in oligopoly markets. In some 
cases, this may lead to a prisoner’s dilemma where the switching barriers for the 
customers are low, while the vendors carry all switching costs.
If there is a choice between two or more incompatible technological standards 
offering the same services to the consumers, such as VHS vs Betamax and 
QWERTY vs DVORAK, the market eventually chooses just one of them. This is a 
strong case of lock-in resulting in a winner-takes-all situation. To end up in this 
state depends on luck, random events, and network effects, or in other words, the 
selection of final state is path dependent.
Providers of social networking services may also end up as de facto monopolies 
(e.g., Facebook). Switching barriers in favor of the provider are built up by the 
users themselves by creating and joining communities of users: the more communi-
ties a user is member of, the larger is the psychological barrier to leave. Facebook 
is a good example of a case where there are no monetary barriers against switching 
but huge psychological ones.