Platform Competition and Endogenous Switching Costs

Abstract

This paper considers intra-platform technologies that allow a consumer's content and preferences to carryover across platform generations. In many platform industries content consumed on a platform's previous generation can be used on the platform's new generation. Naturally, a consumer with more content incurs a greater cost to switch platforms. Instead of discounting the first period consumer price (the standard result), I find that a platform subsidizes content procurement. This still provides a bargain to first period consumers in the form of more content, but it also generates a more extensive second period markup to consumers. To further highlight the usefulness of the model, data from the video game market is used to provide additional insights on consumer primitives, and to explain how Sony generated endogenous switching costs which allowed them to dominate the video game market in the early 2000s.

Keywords: Two-sided markets, Network externalities, Switching costs, Endogenous switching costs, Consumer lock-in

JEL Classification: D40, L41, L22