Guidelines for Research Paper and Discussant Report Econ 142CW Industrial Organization III Prof. Jiawei Chen 1. Research Paper For this course, I will accept three different types of original research papers: case study, empirical analysis, or theoretical analysis. Your paper should have a clear link to what we cover in this course (lectures and readings). General Approach (a) Focus on a common practice of modern firms Examples: advertising, price discrimination (b) Focus on a common feature of modern markets Examples: role of new technology, government regulation After choosing one of the two general approaches above, you should decide whether you want to do a case study, an empirical analysis, or a theoretical analysis within that general approach. (a) A Common Practice of Modern Firms Select a firm practice that interests you. In preparation for undertaking the research, you should evaluate the industries and major firms to which this practice appears to be important. Compare and contrast: why is this practice more prevalent in one industry than another? Why does firm X adopt this practice more than firm Y? Brainstorming in this manner should lead you to some interesting research topics. For a case study, you should examine a particular instance of this practice by a firm (or a select group of firms) in an industry. In general, you should pick an instance where the practice raises some public policy concerns. As you are choosing a single instance, I will expect a detailed, micro-level analysis, along the same lines as the case studies presented in The Antitrust Revolution. For an empirical study, you should collect data on firms and/or industries in which these practice occur in differing amount or form. Use the data to measure either the determinants of the practice (what are the factors that lead firms to adopt this practice) or the impact of the practice on firm/industry performance. An ideal paper would examine both. The main constraints would be [1] the availability of relevant data and [2] familiarity with econometrics and econometrics software. For a theoretical study, you can do one of two things: you can either write a literature review on the recent models proposed by academic economists to explain some aspect of the chosen 1 firm practice or write your own model (can and most likely will be an extension of an existing model). The first option will require you to read and synthesize quite a few academic papers, some of which will be technical in nature. The second option will require you to gain familiarity with the analytical tools of modern economics, including constrained optimization and game theory. (b) A Common Feature of Modern Markets This approach is similar to (a) above but focuses on a market feature instead of a firm practice. Requirements The outline should be approximately 2-3 pages and the paper should be approximately 12-15 pages (doubled-spaced, 12-point font, and 1-inch margins). I expect the paper to be well-written. Properly document your paper and use formal citation practices. As a warning, I will prosecute plagiarism to the fullest extent. I do not mind you using research or information from another source as long as you properly cite it. A good reference on how to properly cite your sources is the MLA Handbook for Writers of Research Papers, available in the Langson Library Reference Collection. Related information is also available online in the MLA Formatting and Style Guide provided by Purdue Online Writing Lab, located at: https://owl.purdue.edu/owl/research_and_citation/mla_style/mla_formatting_and_style_guide/ml a_formatting_and_style_guide.html. 2. Discussant Report The discussant report involves approximately 4-5 pages (doubled-spaced, 12-point font, and 1inch margins) summarizing a case study in the textbook or a paper listed in the references in the textbook and offering comments and suggestions to help the author improve the paper. The purpose is to develop your ability to critically evaluate research. Your report should be precise throughout, but don't be afraid to have strong opinions. Avoid making superficial comments or only summarizing the paper—your report should ideally demonstrate the depth and breadth of your knowledge in Industrial Organization. Include the following in your report: A. Summary. For example:  What are the questions and goals of the paper?  What is the theoretical/empirical framework being used?  What are the most interesting ideas and results?  How do they relate and compare to other research? B. Comments. For example:  Are the research questions interesting?  Are the assumptions reasonable?  Do the results answer the stated questions?  Are the results generalizable? 2 C. Suggestions. For example:  Are there alternative frameworks or approaches that are more suitable for the stated questions?  Using the present model, what other interesting questions can be answered? What other results would you like to see?  Are there important extensions that should be considered? 3 Switching Costs and Network Compatibility Jiawei Chen University of California, Irvine Econ 142CW Chen (University of California, Irvine) Switching Costs and Network Compatibility Econ 142CW 1 / 49 Network e¤ect A product or service has network e¤ect (NE) if its value to a consumer increases in the number of its users mobile phone services (NE: discounts for on-net calls) banking services (NE: branch and ATM networks) etc. Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 2 / 49 Two prominent features of network industries Two prominent features of network industries: consumers’switching costs and …rms’compatibility choices (1) Switching costs (SC): consumers can switch between networks but costly to do so switching from one mobile phone network to another: pay early termination fees switching from one bank to another: needs to inform all relevant parties (direct deposits, automatic payments, etc.) etc. According to Shy (2001), SC is one of the main characteristics of network industries Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 3 / 49 Two prominent features of network industries (2) Firms sometimes make their networks compatible Compatibility between two networks: the ability of consumers in either network to enjoy network e¤ect from both networks mobile phone service providers may extend their on-net calling discounts to cover each other’s networks banks may allow their customers to access their combined ATM networks without extra fees Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 4 / 49 This paper investigate the e¤ects of SC on network compatibility a dynamic duopoly model with an in…nite horizon in each period, …rms choose both network compatibility and prices numerically solve for a Markov perfect equilibrium of the model study how SC a¤ect …rms’compatibility choices and social welfare Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 5 / 49 Policies Motivated by recent and growing trend of regulations that aim at reducing SC in network industries mobile number portability (MNP) was implemented in many countries in recent years to reduce consumer SC in mobile phone industry in the EU retail banking and payments systems markets, the European Competition Authorities (ECA) recommends the implementation of switching facilities and account number portability to lower SC Many studies on the e¤ects of SC on market concentration and prices Little is known about how a change in SC a¤ects …rms’network compatibility choices (shared on-net calling discounts, shared ATM networks, etc.) Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 6 / 49 Findings SC tend to induce compatible networks Firms face a choice between two modes of competition make their networks incompatible and …ght for market dominance or make their networks compatible and peacefully share the market SC incentivize …rms to harvest their locked-in consumers rather than price aggressively for market dominance tip the balance in favor of peaceful sharing change the market from …erce competition and incompatible networks to mild competition and compatible networks Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 7 / 49 Findings Welfare analysis: In a network industry with high SC: a public policy that reduces SC, by itself, does not lead to signi…cant increase in total surplus e¢ ciency gains from lowering SC o¤set by e¢ ciency losses from …rms reducing the compatibility between their networks Combining the policy with a mandatory compatibility policy can lead to unambiguous and sizable e¢ ciency gains such a combination makes it possible to have the best of both worlds— low SC and compatible networks an example of mandatory compatibility policy: ATM surcharge bans Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 8 / 49 Empirical evidence Empirical observations in some real-world industries provide anecdotal evidence that supports the model predictions in this paper Mobile number portability (MNP) was implemented in Hong Kong in 1999, which reduced consumers’SC During implementation period, mobile phone service providers reduced the compatibility among their networks (shared on-net calling discounts) by adopting network-based discriminatory pricing schemes Following the implementation of MNP, prices decreased sharply Large …rms grew larger at the expense of smaller …rms, resulting in a higher level of market concentration These patterns are consistent with the model predictions Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 9 / 49 Model Discrete time with an in…nite horizon Two …rms selling to a sequence of buyers with unit demands At the start of a period, …rm i is endowed with an installed base (users of its product), bi 2 f0, 1, . . . , M g M is consumer population: upper bound on the sum of the …rms’ installed bases Outside option (“no purchase”), indexed 0 b0 = M b1 b2 does not o¤er network bene…ts Industry state: b = (b1 , b2 ) Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 10 / 49 Model In each period, …rms engage in a two-stage game, choosing compatibility in the …rst stage and prices in the second stage di 2 f0, 1g: compatibility choice of …rm i, where di = 1 means “propose compatibility” Networks are “compatible” if and only if d1 d2 = 1 After compatibility is determined, …rms simultaneously choose prices in the second stage Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 11 / 49 Model Demand in each period comes from a random consumer r 2 f0, 1, 2g denotes the good that the consumer is loyal to e.g. a consumer’s product dies and she returns to the market!loyal to the brand that she previously has Pr(r = j jb ) = bj /M a larger installed base implies a larger expected demand from loyal consumers Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 12 / 49 Model The utility that a consumer who is loyal to r gets from buying good i is vi + 1(i 6= 0)θg (bi + d1 d2 b i ) pi 1(r 6= 0, i 6= 0, i 6= r )k + ei vi is the intrinsic product quality …xed over time; common across …rms: vi = v , i = 1, 2 without loss of generality, set v = 0, but consider di¤erent values for v0 bi + d1 d2 b i is the e¤ective installed base of …rm i given the compatibility choices d1 and d2 θg (.) captures NE θ Chen (UC Irvine) 0 controls the strength of NE; g (bi ) = bi /M Switching Costs and Network Compatibility Econ 142CW 13 / 49 Model The utility that a consumer who is loyal to r gets from buying good i is vi + 1(i 6= 0)θg (bi + d1 d2 b i ) pi 1(r 6= 0, i 6= 0, i 6= r )k + ei pi denotes the price for good i; p0 is always zero k 0 denotes SC incurred if the consumer switches from one inside good to the other ei is the consumer’s idiosyncratic preference shock for good i TIEV, ind. across products, consumers, time!logit choice probabilities Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 14 / 49 Model Timing of the model: …rms are endowed with installed bases b = (b1 , b2 ) depreciation then takes place (e.g. product death) each unit of installed base ind. depreciates with probability δ 2 [0, 1] …rms choose compatibility and then prices without knowing ei or r consumer chooses the good that o¤ers the highest current utility next-period state b 0 is determined according to depreciation and sale Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 15 / 49 Types of equilibria Three qualitatively distinct equilibria are found: Rising, Tipping, and Compatibility Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 16 / 49 Rising equilibrium Rising equilibrium: when both NE and SC are weak 20 20 15 10 5 * 0 0 * * * * * ** * 15 2.2 2 1.8 1.6 1.4 1.2 20 * 10 20 10 10 20 10 0 0 5 0 0 10 20 (1) Compatibility reports the compatibility region in the state space an asterisk indicates a state in which both …rms prefer compatibility and therefore the networks are compatible in a Rising equilibrium, networks are generally incompatible Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 17 / 49 Rising equilibrium Rising equilibrium: when both NE and SC are weak 20 20 15 10 5 * 0 0 * * * * * ** * 15 2.2 2 1.8 1.6 1.4 1.2 20 * 10 20 10 10 10 0 0 20 5 0 0 10 20 (2) Firm 1’s policy function plots …rm 1’s equilibrium price as function of the …rms’installed bases relatively monotonic policy function a …rm’s price rises in own installed base and falls in rival’s installed base Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 18 / 49 Rising equilibrium Rising equilibrium: when both NE and SC are weak 20 20 15 10 5 * 0 0 * * * * * ** * 15 2.2 2 1.8 1.6 1.4 1.2 20 * 10 20 10 10 20 10 0 0 5 0 0 10 20 (3) Resultant forces arrows show the expected movement of the state from one period to the next global convergence towards symmetric states market dominance unlikely Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 19 / 49 Types of equilibria With non-trivial NE and/or SC, two types of equilibria occur Tipping equilibrium Compatibility equilibrium These two types of equilibria are the focus of our attention Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 20 / 49 Tipping equilibrium Tipping equilibrium: when NE is strong and SC is modest 20 20 15 * 10 15 2 0 -2 10 20 5 0 0 20 10 * 10 20 10 0 0 5 0 0 10 20 (1) Compatibility in a Tipping equilibrium, the networks are almost always incompatible Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 21 / 49 Tipping equilibrium Tipping equilibrium: when NE is strong and SC is modest 20 20 15 * 10 15 2 0 -2 10 20 5 0 0 20 10 * 10 10 0 0 20 5 0 0 10 20 (2) Firm 1’s policy function intense price competition when …rms’installed bases are of comparable size (deep trench along and around the diagonal) away from the diagonal, competition softens Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 22 / 49 Tipping equilibrium Tipping equilibrium: when NE is strong and SC is modest 20 20 15 * 10 15 2 0 -2 10 20 5 0 0 20 10 * 10 20 10 0 0 5 0 0 10 20 (3) Resultant forces industry tends to move away from diagonal once an asymmetry arises industry converges to highly asymmetric states market likely to be dominated by a single …rm Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 23 / 49 Compatibility equilibrium Compatibility equilibrium: when SC is strong 20 20 15 15 4 10 5 * 0 0 * 2 * *** ****** ***** ***** ****** **** **** ** 10 10 0 20 20 10 20 10 0 0 5 0 0 10 20 (1) Compatibility networks are compatible when …rms have comparable installed bases Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 24 / 49 Compatibility equilibrium Compatibility equilibrium: when SC is strong 20 20 15 15 4 10 5 * 0 0 * 2 * *** ****** ***** ***** ****** **** **** ** 10 10 0 20 20 10 10 0 0 20 5 0 0 10 20 (2) Firm 1’s policy function in compatibility region, prices are high, peaking at the point where each …rm has half of the consumers Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 25 / 49 Compatibility equilibrium Compatibility equilibrium: when SC is strong 20 20 15 15 4 10 5 * 0 0 * 2 * *** ****** ***** ***** ****** **** **** ** 10 10 0 20 20 10 20 10 0 0 5 0 0 10 20 (3) Resultant forces global convergence towards symmetric states market dominance unlikely Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 26 / 49 Switching Costs and the Type of Equilibrium 4 3 2 1 0 1 2 3 shows the type of equilibrium that occurs for di¤erent combinations of θ (strength of NE) and k (SC) R = Rising, T = Tipping, C = Compatibility Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 27 / 49 Switching Costs and the Type of Equilibrium 4 3 2 1 0 1 2 3 when NE is modest (θ 2): a Rising equilibrium at low SC and a Compatibility equilibrium at high SC when there is strong NE (θ > 2): a Tipping equilibrium at low SC and a Compatibility equilibrium at high SC Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 28 / 49 Switching Costs and Compatibility 0.5 0 4 3 3 2 2 1 1 0 plots probability that networks are compatible (based on long-run probability distribution of industry state) for di¤erent combinations of θ and k Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 29 / 49 Switching Costs and Compatibility 0.5 0 4 3 3 2 2 1 1 0 when SC is low, probability of compatible networks is small for weak NE and essentially zero for strong NE this probability increases signi…cantly as SC increases SC induces …rms to make their networks compatible Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 30 / 49 Switching Costs and Market Concentration 0.7 0.6 4 3 3 2 2 1 1 0 changes in SC alter type of equilibrium in the market and …rms’ compatibility choices one consequence is that the level of market concentration is a¤ected this …gure shows expected long-run Her…ndahl-Hirschman Index (HHI) a higher HHI indicates a more concentrated market Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 31 / 49 Switching Costs and Market Concentration 0.7 0.6 4 3 3 2 2 1 1 0 when NE is modest (θ 2), HHI is low throughout when NE is strong (θ > 2), HHI is high at low SC, but drops signi…cantly at high SC market is dominated by a single …rm at low SC (high market concentration in a Tipping equilibrium) but becomes fragmented at high SC (low market concentration in a Compatibility equilibrium). Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 32 / 49 Switching Costs and Price 2.5 2 1.5 4 3 3 2 2 1 1 0 increases in SC increase the average price substantially, for both small NE and large NE Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 33 / 49 Mobile number portability (MNP) in Hong Kong Revisit the Hong Kong MNP example the model and results in this paper o¤er a possible explanation MNP!lower SC!changes equilibrium from Compatibility to Tipping correspondingly: (1) …rms reduce compatibility between their networks, (2) prices go down, and (3) level of market concentration goes up this is exactly what happened in Hong Kong when MNP was implemented in 1999 provides anecdotal evidence that supports model predictions in this paper Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 34 / 49 Public Policies and Welfare Evaluate two public policies in network industries related to SC and compatibility 1 reduction in SC mobile number portability in mobile phone industry account number portability in banking industry 2 mandatory compatibility between di¤erent networks, such as shared on-net calling discounts and shared ATM networks Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 35 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 Each panel plots how an equilibrium outcome variable is a¤ected when k (SC) is varied between 0 and 3 From left to right, the panels show probability of compatible networks, producer surplus (PS), consumer surplus (CS), and total surplus (TS), respectively Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 36 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 In each panel, three compatibility regimes are considered: 1 2 3 endogenous compatibility (EC; dash-dot line): the laissez faire regime; corresponds to the model that we have been analyzing so far mandatory compatibility (MC; solid line): impose the condition that networks are compatible for comparison purposes, also consider prohibited compatibility (PC; dotted line): impose the condition that networks are incompatible Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 37 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (1) Compatibility under EC (dash-dot line), as SC is reduced from 3 to 0, …rms become less likely to make their networks compatible brings the industry farther away from MC (solid line) and closer to PC (dotted line) Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 38 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (2) Producer Surplus and (3) Consumer Surplus both PS and CS increase successively as we move from PC to EC to MC everything else equal, making networks compatible generates larger bene…ts from network e¤ects enlarges “economic pie” and allows both …rms and consumers to be better o¤ Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 39 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (2) Producer Surplus reducing SC generally lowers PS under each of the three compatibility regimes as it becomes easier for consumers to switch, …rms focus more on competing for each other’s customers and less on exploiting their locked-in customers higher intensity of price competition lowers …rms’pro…ts Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 40 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (3) Consumer Surplus if we hold probability of compatible networks …xed (either MC or PC), a reduction in SC unambiguously increases CS however, under EC, e¤ect of a reduction in SC on CS becomes ambiguous two concurrent changes: reduction in SC, and the consequent reduction in probability of compatible networks while the former increases CS, the latter reduces it; net e¤ect ambiguous Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 41 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (3) Consumer Surplus Under EC reducing SC from 3 to 0 decreases CS from 11.7 (point A) to 9.5 (point B) Combine the reduction in SC with mandatory compatibility CS increases signi…cantly from 11.7 (point A) to 23.3 (point C) much bigger increase in CS from A to C than from A to B Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 42 / 49 Public Policies and Welfare 4 1 0.5 0 30 30 C MC 3 20 2 10 EC 20 B A 10 PC 1 0 1 2 3 0 0 1 2 3 0 0 1 2 3 0 1 2 3 (4) Total Surplus When SC changes, variation in PS is much smaller than variation in CS So changes in TS (=PS+CS) are largely determined by changes in CS!we observe patterns in TS similar to those in CS Under EC: reducing SC from 3 to 0 decreases TS from 14.4 to 10.8 Combine the reduction in SC with mandatory compatibility: TS increases signi…cantly from 14.4 to 25.3 Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 43 / 49 Public Policies and Welfare Policy implication a public policy that reduces SC, by itself, does not lead to substantial increase in TS e¢ ciency gains from lowering SC are o¤set by e¢ ciency losses from …rms reducing compatibility between their networks combining the policy with a mandatory compatibility policy can lead to unambiguous and sizable e¢ ciency gains such a combination makes it possible to have the best of both worlds— low SC and compatible networks Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 44 / 49 Conclusion Investigate how consumer SC a¤ect …rms’compatibility choices and social welfare in network industries SC tend to induce compatible networks A public policy that reduces SC also tends to make networks incompatible, and results in small e¢ ciency gains at best Combining the policy with a mandatory compatibility policy can lead to unambiguous and sizable e¢ ciency gains Call for further research on design and evaluation of public policies related to SC and network compatibility Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 45 / 49 Extensions 1. Forward-looking …rms and consumers Dual dynamics (dynamics on both the supply side and the demand side) How does consumers’forward-looking behavior a¤ect …rms’pricing and compatibility choices? Is market dominance more or less likely when consumers are forward-looking? How are CS, PS, and social welfare a¤ected? Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 46 / 49 Extensions 2. Allow …rms to innovate Each …rm invests in R&D to improve product’s intrinsic quality over time Is network size or product quality more important in determining eventual winner in the market? Which …rm tends to invest more in R&D, larger …rm or smaller …rm? When products are made compatible, do …rms invest more or less in R&D? Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 47 / 49 Extensions 3. Endogenous SC In real-world industries, some SC are exogenous and some are endogenous E.g., transaction costs, learning costs, and search costs are typically exogenous, not much a¤ected by …rms’actions In contrast, contractual commitments and loyalty programs are endogenous, result of …rms’actions This paper has focused on exogenous SC and abstracted from the endogenous ones Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 48 / 49 Extensions 3. Endogenous SC (cont.) In some industries endogenous SC are an important factor E.g. early termination fees in television and wireless contracts In those industries …rms often face three decisions: price of their good endogenous component of their own good’s SC compatibility choice How do endogenous SC a¤ect …rms’pricing and compatibility decisions, market structure, and ultimately, welfare in the economy? Chen (UC Irvine) Switching Costs and Network Compatibility Econ 142CW 49 / 49 
Purchase answer to see full attachment