Switching Costs, Network Effects, and Networking Equipment: Compatibility and Vendor Choice in the Market for LAN Equipment

This paper examines the importance of compatibility on buyer behavior in the market for LAN equipment over the period 1996 through 1998. I provide evidence that switching costs drive firm establishments to purchase LAN equipment from incumbent vendors. Because LAN equipment is a networked good, incumbency affects vendor choice both when it occurs at the same establishment and/or at other establishments within the same firm. Moreover, compatibility across different product lines within the same vendor also influences vendor choice. This manifests itself in a buyer tendency to purchase routers and switches from the same vendor. These propositions are explored in data on purchases of LAN equipment utilizing open standards such as the Ethernet networking protocol, and represent the first econometric measurement of compatibility effects within products utilizing open standards. These findings show that there are strong economic incentives to offer broad product lines, and provide some rationale for the acquisition strategies of major vendors.