Coordination and Lock-In:Competition with Switching Costs

and Network E¤ectsPart IV of IV Conclusion and References

December 2004the latest version of this paper, and related material, will be at

www.paulklemperer.org

Joseph FarrellUniversity of California, Berkeley

549 Evans Hall # 3880Berkeley, CA 94720-3880

USA

email: farrell@econ.berkeley.edu

and

Paul KlempererNu¢ eld College, Oxford University

Oxford OX1 1NFEngland

Int Tel: +44 1865 278588

email: paul.klemperer@economics.ox.ac.uk

First draft: 1997This draft: 2004

PRELIMINARY DRAFT: PLEASE SEND COMMENTS

c Joseph Farrell and Paul Klemperer, 2004

1

1 Introduction

2 Switching Costs and Competition

3 Network E¤ects and Competition

4 Conclusion

Switching costs and network e¤ects create fascinating market dynamics andstrategic opportunities. They link trades that are not readily controlled bythe same contract: future trades in the case of switching costs, and tradesbetween the seller and other buyers in the case of network e¤ects. Wehave stressed that the result can be e¢ cient competition for larger units ofbusiness ��competition for the market�. Thus neither switching costs nornetwork e¤ects are inherently and necessarily problematic. But they veryoften make competition, perhaps especially entry, less e¤ective. So we favorcautiously pro-compatibility public policy. And policymakers should lookparticularly carefully at markets where incompatibility is strategically chosenrather than inevitable.

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