Chapter 12 - Lock-In and Switching Costs

Question 1

What are lock-ins?

Answer 1

They are all possible strategies a vendor can implement to establish barriers* which prevent its customers to switch to another competitor.

Question 2

What are switching costs?

Answer 2

They refer to the costs born by customers to switch to another competitor (customer switching costs) or born by vendors to keep customers (vendor switching costs).

Question 3

What specific cause of lock-in effect is the most popular in the digital economy? Examples

Answer 3

Backward compatibility is a type of lock-in effect, in which newer versions of equipment or software can operate smoothly with older versions.

Examples: Microsoft Office (lock-in), mobile systems (GSM, 3G, 4G and 5G, which just reduce the switching costs of users to zero, without causing lock-ins).

Question 4

What role do search algorithms play as lock-ins?

Answer 4

Search algorithms are essential for larger value networks, which collect user data and sell them to retailers, which can more efficiently direct advertisements to the right potential customers.

Question 5

What is meant with product tying? Example

Answer 5

It is a business practice, in which the customer must purchase one product/service (tied) in addition to the product/service they wanted to buy.

Example: Microsoft Windows softwares and their browsers Microsoft Edge (previously: Internet Explorer).

Question 6

Which strategy is implemented by companies with regard to switching costs?

Answer 6

1. To keep customers by making the switching costs for the customers (barriers to leave) as high as possible
2. To capture customers from competitors by making the switching cost for customers from competitors (barriers to enter) as small as possible.