How do Switching Costs Affect Market Concentration and Prices in Network Industries?

Switching costs are prevalent in network industries, and this paper investigates their effects on market outcome. I find that the role of switching costs depends on network effects and the outside option. Without a viable outside option, high switching costs can neutralize the tendency towards market dominance associated with network effects, but with a viable outside option, switching costs facilitate market dominance. Furthermore, switching costs lower prices if network effects are modest and there exists a viable outside option, but raise prices otherwise. Understanding these patterns will allow us to better predict the consequences of policies that change switching costs.