Switching Costs in Network Industries

In network industries, switching costs have two opposite effects on thetendency towards market tipping. First, the fat-cat effect makes thelarger firm price less aggressively and lose consumers to the smallerfirm. This effect tends to prevent tipping. Second, thenetwork-solidifying effect reinforces network effects by making anetwork size advantage longer-lasting and hence more valuable, thusintensifying price competition when networks are of comparable size.This effect tends to cause tipping. I find that when switching costs arehigh, the fat-cat effect dominates and an increase in switching costscan change the market from a tipping equilibrium to a sharingequilibrium. When switching costs are low, the network-solidifyingeffect dominates and an increase in switching costs can change themarket from a sharing equilibrium to a tipping equilibrium. Policyintervention to remove switching costs in network industries maysubstantially reduce the likelihood of market tipping.