Endogenous Switching Costs and Exclusive Systems Applications

This paper reviews Garcia Mariñoso's 2001 Journal of Industrial Economics article on endogenous switching costs and product compatibility. In that paper, Garcia Mariñoso concludes that producers of so-called product systems (which consist of hardware or platforms plus applications) can have strong incentives to achieve compatibility so that applications can be used with different hardware/platforms. This is because compatibility reduces consumer switching costs which in turn allows producers to charge higher prices for the hardware or platform initially. However, compatibility does not always need to be efficient, and there is a risk of excess compatibility. The issue is relevant for goods such as videogame systems like Sony's Play Station, but also for 3G mobile communication systems where users first buy mobile handsets and later purchase services from so-called content providers.