Multi-dimensional analysis of perceived switching costs

The creation of switching costs for customers is an important aspect of strategic planning in today's competitive environment. These costs enable firms to address variations in customer preferences and competitor influence in attempting to gain their customers' loyalty. Although the recognition of the importance of such switching costs has long existed in a variety of contexts, the conceptualization and measurement of the construct is lacking in clarity and consistency. This study proposes that perceived switching costs (PSC) constitute a higher-order construct made up of six dimensions that reflect the customers' perception of the time, effort, and money involved in the switching process. The study also proposes that each of the six dimensions has a distinctive set of antecedents and outcomes. The test of the model is an empirical study in the Spanish insurance sector. The results confirm the validity of the higher-order formative construct of PSC and provide insights for specific strategies to address the perceptions of various customers with regard to switching costs.     

Securing business-to-business relationships: The impact of switching costs

While the relationship marketing literature acknowledges the importance of switching costs for increasing customer retention, little is known about its relevance in industrial markets. In particular, it is unclear whether switching costs, and associated dimensions, impact on behavioral outcomes of buyer–seller relationships in business-to-business (B2B) markets. In order to contribute to theory development in this important area, our research first explores the dimensions of switching costs for the B2B domain and also tests the relative impact of these dimensions on business customers' actual purchase behavior. Results suggest that switching costs in B2B settings are a multi-faceted construct, including (i) procedural, (ii) financial, and (iii) relational switching costs. Moreover, we find relational switching costs to be most important for securing B2B buyer–seller relationships since they impact a customer's (a) share-of-wallet, (b) cross-buying behavior, and (c) actual switching behavior. While procedural switching costs only influence share-of-wallet, financial switching costs solely impact customer's cross-buying behavior. These findings contribute to a better understanding on how to secure B2B buyer–seller relationships.     

Customer capabilities,switching costs,and bank performance

Customers develop switching costs when they invest time and effort to develop capabilities required to optimally use a given product. Such capabilities are likely to be firm specific and cannot be transferred perfectly to competitors' product offerings. Customers who face switching costs are likely to remain with the same firm and consume complementary products that meet their needs. Thus, firms can achieve competitive advantage by exploiting customers' switching costs. In this paper, we hypothesize that the extent to which firms can benefit from customers' switching costs is contingent upon the firms' internal cross‐selling capabilities. We use online banking data to test our hypotheses and find that customers' switching costs contribute to banks' profitability only in the presence of high levels of internal cross‐selling capabilities. Copyright © 2012 John Wiley & Sons, Ltd.     

Reducing the level of switching costs in mobile communications: The case of Mobile Number Portability

Switching costs are one of the most important economic forces that affect market competition in mobile communications. Both theoretical and empirical studies have shown that switching costs reduce market competition leading to higher prices, lower product and service quality, and lower customer welfare. Given their negative consequences, national regulatory authorities have designed policies aimed at reducing switching costs and fostering competition. One of the most important of these, in the mobile communications industry, is mobile number portability (MNP). The aim of this paper is to investigate the effect of MNP on switching costs in mobile phone services. First, a hierarchical Bayes model is proposed to measure switching costs at the customer level and to investigate the impact of MNP on them. Second, this study examines the drivers of MNP adoption by customers using a binary logit specification. The results reveal that this regulatory policy has significantly reduced the cost of switching and that MNP adoption partially depends on customer-related variables.     

Estimating switching costs involved in changing mobile phone carriers in Japan: Evaluation of lock-in factors related to Japan’s SIM card locks

This paper employs a web-based conjoint-type questionnaire to examine empirically user preference for a hypothetical Subscriber Identity Module (SIM) unlock situation in Japan’s mobile phone market. This paper also analyzes carriers’ other marketing strategies to lock in consumers. The empirical analysis in this study reveals the following: over 80% of survey respondents evaluate a highly compatible platform with the SIM unlocked. Approximately 70% of consumers find that the value of discounts on initial payments exceeds the discounts on one-year monthly payments. In addition, conditions set by continuing agreements for mobile carriers and mobile handsets reduce consumer benefit by 35% at the median in the case of SIM unlocking with compatible platforms.     

Capital costs and profitability

The paper estimates a line-of-business (LB) cost-of-capital and derives explicitly its link — in long-run competitive equilibrium — to profitability measured as LB operating income to LB assets. The ways that observed profitability differs from what would obtain in competitive equilibrium are explored.     

Transaction costs and competition policy

This paper evaluates current antitrust policy in light of our current understanding of how transaction costs influence the ability of firms and consumers to deal with market power. The paper shows how the failure to consider transaction costs can lead to erroneous policy decisions. Many models employed today make simplifying assumptions about transaction costs that can lead to biased results in analyzing vertical and horizontal issues. The increased ability to monitor the effect of promotional behavior should cause us to reexamine whether free riding justifications, previously accepted as justifications for various vertical restrictions, still hold. Nash bargaining and Nash-in-Nash models raise concerns about the simplified assumptions assumed in which supposedly high transaction costs restrict the choice and form of the assumed competitive alternatives. The increasing importance of two-sided markets together with an understanding of transaction costs is needed to understand antitrust conduct in those markets. The recent Amex case is likely to lead to confused litigation in these types of markets. Finally, the establishment of property rights for a consumer to his or her data could fail to remedy antitrust concerns that certain dominant firms are immune to competition because consumers do not own their data unless that property right is limited so that consumers cannot exclusively sell their data to one firm.     

Falling margins and rising costs

Several recent papers have examined the way that industrial price-cost margins have evolved over time in response to changing demand and competitive conditions. This paper discusses a rationale for the inclusion of a third determining factor — changing unit costs. Time series analysis of a sample of seven oligopolistic industries indicates that in all cases, shocks to unit costs do play an important and statistically significant role in determining the margin. Moreover, the longer term trend in unit costs is also found to have a negative relationship with the margin, in five industries significant. This finding helps explain the decline in price-cost margins in high concentration industries in the 1970s, and provides some micro-level support for the hypothesis of an aggregate profit squeeze in the U.S. manufacturing sector over that period.This paper is drawn in part from the second essay of my Doctoral Dissertation. I would like to thank, without implicating, the members of my committee: Thomas Weisskopf, Stephen Salant, Jeffrey MacKie-Mason, Severin Borenstein, and Valerie Suslow. Ralph Bradburd and an anonymous referee also provided helpful comments.     

Strong medicine for health costs

Companies feeling blue--or in the red--over feverish employee medical expenses have found some relief. Just take an HMO and add a twist.     

Breakeven analysis with semifixed costs

Breakeven analysis is a commonly used tool for decision making by industrial marketers. This article examines the traditional breakeven methodology and describes a method to include semi-fixed expenses to make the tool more applicable to situations typically encountered by industrial marketing managers.     

Spatial Price Discrimination with Heterogeneous Firms

In this paper we aim to explain intuitively heterogeneous firms’ optimal location decisions in a simple spatial market. To do so, we present and solve a four‐stage game of entry, location, pricing and consumption in a spatial price discrimination framework with arbitrarily many heterogeneous firms. We provide a unique equilibrium outcome without imposing restrictions on the distribution of marginal costs across firms.     

Heterogeneous Firms and Asymmetric Product Differentiation

We introduce asymmetric product differentiation in a model characterized by a linear demand system, endogenous markups and heterogeneous firms (as in Melitz‐Ottaviano [2008]). In particular, a single industry is divided into a number of market segments, each characterized by a different degree of horizontal product differentiation. Such a setup allows us to explain, within a single theoretical framework, the non‐linear relations between firm productivity, size and exporting behavior that have been documented by the empirical literature. The theoretical results are tested empirically by examining the performance of French wine producers operating in market segments characterized by different levels of horizontal product differentiation. Such segments are identified using the official classification of French wines based upon the controlled denomination of origin, i.e., the Appellation d'Origine Contrôlée (AOC) system.     

Switching costs in local credit markets

Switching costs are a key determinant of market performance. This paper tests their existence in the corporate loan market in which they are likely to play a central role because of the complexity of contracts and the relevance of informational problems. Using very detailed data at bank-firm level on four Italian local credit markets we empirically show that firms tend to iterate their choice of the main bank over time. This inertia is not related to unobserved and time invariant firms' preferences across banks and can be attributed to the existence of switching costs. Moreover these costs are higher for single-bank firms. We also offer evidence that banks price discriminate between new and old borrowers by charging lower interest rates to the former in order to cover part of the switching costs. The discount amounts to about 44 basis points and is equal to 7% of the average interest rate. These results prove robust to a number of other potential identification drawbacks.     

The social costs of monopoly?

The essay recounts the contributions of earlier economists to the discussion of the social costs of monopoly. They largely duplicate more contemporary contributions.     

Benefits and costs of food safety regulation

This paper begins with a review of the concepts and methods that can be used to quantify the benefits and costs of food safety regulations. On the cost side, where research is only beginning to emerge, this paper also provides an analytical framework for measurement of the costs of statutory regulations in the form of design and performance standards. This paper also discusses the use and limitations of currently available benefit and cost information for quantitative regulatory impact assessment, using the assessment of the mandatory HACCP and pathogen reduction regulations in the United States as an example. The paper concludes with suggestions for future research on quantifying benefits and costs of food safety regulations.