Security and Lock-In

A customer experiences “lock-in” when switching costs exceed the potential incremental value of alternative suppliers’ products over its current supplier’s product. Customers may regret this state of affairs if they would have been better off having secured the alternative product from the start, or more simply, if the switching costs were substantially lower than the incremental value of the alternative supplier’s product (in which case, they would switch and capture the difference). Conversely, an incumbent supplier might appreciate and indeed encourage this state of affairs to the extent it can realize additional profit. These two interact in the sense that a supplier would likely forego additional profit (and a customer would receive lower prices) if switching costs were lower, even if the customer does not actually switch. Less apparently, though potentially more importantly, lock-in may have substantial impact on the types of product innovation a customer accesses, both directly from its supplier and indirectly through innovation in complementary products.