Effects of switching costs on innovative investment
Abstract
Switching costs and innovation are two major issues in economics. Prior research demonstrates the effects of switching costs on competition, but ignores the influence of switching costs to firm innovation. So the purpose of this study is to reveal the relationships between switching costs and cost-reducing innovation by considering brand loyalty. All our theoretical conclusions are captured by game theory based on a two-stage duopoly model. The conclusions of this study show that under moderate conditions, switching costs improve competition. Strong firms implement lower price when switching costs are present than when they are not present. Second, at the asymmetric equilibrium, lower-efficiency firms with switching costs launch less innovative investments than do those without switching costs, while higher-efficiency firms with switching costs launch more innovation. But under symmetric equilibrium, switching costs have no effect on innovative investment. The novel contributions of this paper are that we find switching costs and loyalty have vertical impacts on firms’ cost-reducing innovation, which extends the theory of switching costs.
Keyword : switching cost, cost-reducing innovation, competition, commitment, game theory
How to Cite
Nie, P.-Y., Wang, C., Chen, Y.-H., & Yang, Y.-C. (2018). Effects of switching costs on innovative investment. Technological and Economic Development of Economy, 24(3), 933-949. https://doi.org/10.3846/tede.2018.1430
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Capone, G., Malerba, F., & Orsenigo, L. (2013). Are switching costs always effective in creating firstmover advantage? The moderating role of demand and technological regimes. Long Range Planning, 46, 348-368. https://doi.org/10.1016/j.lrp.2013.06.001
Chen, Y. H., Nie, P. Y., & Wang, X. H. (2015). Asymmetric duopoly competition with innovation spillover and input constraints. Journal of Business Economics and Management, 16(6), 1124-1139. https://doi.org/10.3846/16111699.2013.823104
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Chen, Y. H., Nie, P. Y., & Wen, X. W. (2015b). Analysis of innovation based on financial structure. Economic Research-Ekonomska Istraživanja, 28(1), 631-640. https://doi.org/10.1080/1331677X.2015.1087327
Chen, Y. H., Wen, X. W., Wang, B., & Nie, P. Y. (2017). Agricultural pollution and regulation How to subsidize agriculture?. Journal of Cleaner Production, 164, 258-264. https://doi.org/10.1016/j.jclepro.2017.06.216
Chen, Y. M. (1997). Paying customers to switching. Journal of Economics and Management Strategy, 6(4), 877-897. https://doi.org/10.1162/105864097567291
Chen, Y. M., & Sappington, D. (2010). Innovation in vertically related markets. Journal of Industrial Economics, 58(2), 373-401. https://doi.org/10.1111/j.1467-6451.2010.00414.x
Chen, Y. M., & Pearcy, J. (2010). Dynamic pricing: when to entice brand switching and when to reward consumer loyalty. RAND Journal of Economics, 41(4), 674-685. https://doi.org/10.1111/j.1756-2171.2010.00116.x
Doganoglu, T. (2010). Switching costs, experience goods and dynamic price competition”. QME- Quantitative Marketing and Economics, 8(2), 167-205. https://doi.org/10.1007/s11129-010-9083-y
Dubé, J.-P., Hitsch, G. J., & Rossi, P. E. (2009). Do switching costs make markets less competitive?, Journal of Marketing Research, 46(4), 435-445. https://doi.org/10.1509/jmkr.46.4.435
Fang, L. H., Lerner, J., & Wu, C. (2017). Intellectual property rights protection, ownership, and innovation: Evidence from China. The Review of Financial Studies, 30(7), 2446-2477. https://doi.org/10.1093/rfs/hhx023
Farrell, J., & Klemperer, P. (2007). Chapter 31 Coordination and Lock-Ii: Competition with switching costs and network effects. Handbook of Industrial Organization, 3, 1967-2072. https://doi.org/10.1016/S1573-448X(06)03031-7
Farrell, J., & Saloner, G. (1985). Standardization, compatibility, and innovation. RAND Journal of Economics, 16(1), 70-83. https://doi.org/10.2307/2555589
Fischer, J. H., & Ross, J. M. (2014). Timing the start of material substitution projects: Creating switching options under volatile material prices. Journal of Product Innovation Management, 31(3), 567-583. https://doi.org/10.1111/jpim.12114
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Jabarnejad, M., & Valenzuela, J. (2016). Optimal investment plan for dynamic thermal rating using benders decomposition. European Journal of Operational Research, 248(3), 917-929. https://doi.org/10.1016/j.ejor.2015.08.010
Klemperer, P. (1987). The competitiveness of markets with switching costs. Rand Journal of Economics, 18(1), 138-150. https://doi.org/10.2307/2555540
Klemperer, P. (1995). Competition when consumers have switching costs: An overview with applications to industrial organization, macroeconomics, and international trade. Review of Economic Studies, 62(4), 515-539. https://doi.org/10.2307/2298075
Morita, H., & Waldman, M. (2010). Competition, monopoly maintenance and consumer switching cost. American Economic Journal: Microeconomics, 2(1), 230-255. https://doi.org/10.1257/mic.2.1.230
Nie, P. Y. (2014). Effects of capacity constraints on mixed duopoly. Journal of Economics, 112(3), 283-294. https://doi.org/10.1007/s00712-013-0362-4
Nie, P. Y. (2018. Comparing horizontal mergers under Cournot with Bertrand competitions. Australian Economic Papers, 57(1), 12-37. https://doi.org/10.1111/1467-8454.12053
Nie, P. Y., & Chen, Y. H. (2012). Duopoly competitions with capacity constrained input. Economic Modelling, 29(5), 1715-1721. https://doi.org/10.1016/j.econmod.2012.05.022
Nie, P. Y., Wang, C., Chen, Z. Y., & Chen, Y. H. (2018). A theoretic analysis of key person insurance. Economic Modelling, to appear. https://doi.org/10.1016/j.econmod.2017.12.020
Nie, P. Y., Yang, Y. C., Chen, Y. H., & Wang, Z. H. (2016). How to subsidize energy efficiency under duopoly efficiently?. Applied Energy, 175, 31-39. https://doi.org/10.1016/j.apenergy.2016.04.105
Parker, G., & Van Alstyne, M. (2018). Innovation, openness, and platform control. Management Science, to appear. https://doi.org/10.1287/mnsc.2017.2757
Sacco, D., & Schmutzler, A. (2011). Is there a U-shaped relation between competition and investment. International Journal of Industrial Organization, 29(1), 65-73. https://doi.org/10.1016/j.ijindorg.2009.09.003
Shen, N., & Su, J. (2015). A comparison of different contract forms for consumers with switching costs and changed preferences. Economic Modelling, 50, 19-26. https://doi.org/10.1016/j.econmod.2015.05.014
Viard, B. (2007). Do switching costs make markets more or less competitive? The case of 800-number portability. RAND Journal of Economics, 38(1), 146-163. https://doi.org/10.1111/j.1756-2171.2007.tb00049.x
Vives, X. (2008). Innovation and competitive pressure. The Journal of Industrial Economics, 56(3), 419-469. https://doi.org/10.1111/j.1467-6451.2008.00356.x
Wang, C., Nie, P. Y., Peng, D. H., & Li, Z. H. (2017). Green insurance subsidy for promoting clean production innovation. Journal of Cleaner Production, 148, 111-117. https://doi.org/10.1016/j.jclepro.2017.01.145
Wang, R. Q., & Wen, Q. (1998). Strategic invasion in markets with switching costs, Journal of Economics and Management Strategy, 7(4), 521-549. https://doi.org/10.1162/105864098567506
Yang, Y. C., Nie, P. Y., Liu, H. T., & Shen, M. H. (2018). On the welfare effects of subsidy game for renewable energy investment: toward a dynamic equilibrium model. Renewable Energy, 121, 420-428. https://doi.org/10.1016/j.renene.2017.12.097
Yang, Y. C., & Nie, P. Y. (2015). R&D subsidies under asymmetric Cournot competition. Economic research-Ekonomska istraživanja, 28(1), 830-842. https://doi.org/10.1080/1331677X.2015.1088791
Cabral, l, L. (2009). Small switching costs lead to lower prices. Journal of Marketing Research, 46(4), 449-451.
Capone, G., Malerba, F., & Orsenigo, L. (2013). Are switching costs always effective in creating firstmover advantage? The moderating role of demand and technological regimes. Long Range Planning, 46, 348-368. https://doi.org/10.1016/j.lrp.2013.06.001
Chen, Y. H., Nie, P. Y., & Wang, X. H. (2015). Asymmetric duopoly competition with innovation spillover and input constraints. Journal of Business Economics and Management, 16(6), 1124-1139. https://doi.org/10.3846/16111699.2013.823104
Chen, Y. H., Nie, P. Y., & Huang, J. B. (2017). Duopoly innovation with monopoly debater. Revista brasileira de gestão de negócios, 19(63), 104-117. https://doi.org/10.7819/rbgn.v19i63.2462
Chen, Y. H., Nie, P. Y., & Wen, X. W. (2015b). Analysis of innovation based on financial structure. Economic Research-Ekonomska Istraživanja, 28(1), 631-640. https://doi.org/10.1080/1331677X.2015.1087327
Chen, Y. H., Wen, X. W., Wang, B., & Nie, P. Y. (2017). Agricultural pollution and regulation How to subsidize agriculture?. Journal of Cleaner Production, 164, 258-264. https://doi.org/10.1016/j.jclepro.2017.06.216
Chen, Y. M. (1997). Paying customers to switching. Journal of Economics and Management Strategy, 6(4), 877-897. https://doi.org/10.1162/105864097567291
Chen, Y. M., & Sappington, D. (2010). Innovation in vertically related markets. Journal of Industrial Economics, 58(2), 373-401. https://doi.org/10.1111/j.1467-6451.2010.00414.x
Chen, Y. M., & Pearcy, J. (2010). Dynamic pricing: when to entice brand switching and when to reward consumer loyalty. RAND Journal of Economics, 41(4), 674-685. https://doi.org/10.1111/j.1756-2171.2010.00116.x
Doganoglu, T. (2010). Switching costs, experience goods and dynamic price competition”. QME- Quantitative Marketing and Economics, 8(2), 167-205. https://doi.org/10.1007/s11129-010-9083-y
Dubé, J.-P., Hitsch, G. J., & Rossi, P. E. (2009). Do switching costs make markets less competitive?, Journal of Marketing Research, 46(4), 435-445. https://doi.org/10.1509/jmkr.46.4.435
Fang, L. H., Lerner, J., & Wu, C. (2017). Intellectual property rights protection, ownership, and innovation: Evidence from China. The Review of Financial Studies, 30(7), 2446-2477. https://doi.org/10.1093/rfs/hhx023
Farrell, J., & Klemperer, P. (2007). Chapter 31 Coordination and Lock-Ii: Competition with switching costs and network effects. Handbook of Industrial Organization, 3, 1967-2072. https://doi.org/10.1016/S1573-448X(06)03031-7
Farrell, J., & Saloner, G. (1985). Standardization, compatibility, and innovation. RAND Journal of Economics, 16(1), 70-83. https://doi.org/10.2307/2555589
Fischer, J. H., & Ross, J. M. (2014). Timing the start of material substitution projects: Creating switching options under volatile material prices. Journal of Product Innovation Management, 31(3), 567-583. https://doi.org/10.1111/jpim.12114
Haj-Salem, N., & Chebat, J. C. (2014). The double-edged sword: The positive and negative effects of switching costs on customer exit and revenge. Journal of Business Research, 67, 1106-1113. Retrieved from . http://www.investopedia.com/terms/s/switchingcosts.asp#ixzz1lBMQCO4l. https://doi.org/10.1016/j.jbusres.2013.05.050
Jabarnejad, M., & Valenzuela, J. (2016). Optimal investment plan for dynamic thermal rating using benders decomposition. European Journal of Operational Research, 248(3), 917-929. https://doi.org/10.1016/j.ejor.2015.08.010
Klemperer, P. (1987). The competitiveness of markets with switching costs. Rand Journal of Economics, 18(1), 138-150. https://doi.org/10.2307/2555540
Klemperer, P. (1995). Competition when consumers have switching costs: An overview with applications to industrial organization, macroeconomics, and international trade. Review of Economic Studies, 62(4), 515-539. https://doi.org/10.2307/2298075
Morita, H., & Waldman, M. (2010). Competition, monopoly maintenance and consumer switching cost. American Economic Journal: Microeconomics, 2(1), 230-255. https://doi.org/10.1257/mic.2.1.230
Nie, P. Y. (2014). Effects of capacity constraints on mixed duopoly. Journal of Economics, 112(3), 283-294. https://doi.org/10.1007/s00712-013-0362-4
Nie, P. Y. (2018. Comparing horizontal mergers under Cournot with Bertrand competitions. Australian Economic Papers, 57(1), 12-37. https://doi.org/10.1111/1467-8454.12053
Nie, P. Y., & Chen, Y. H. (2012). Duopoly competitions with capacity constrained input. Economic Modelling, 29(5), 1715-1721. https://doi.org/10.1016/j.econmod.2012.05.022
Nie, P. Y., Wang, C., Chen, Z. Y., & Chen, Y. H. (2018). A theoretic analysis of key person insurance. Economic Modelling, to appear. https://doi.org/10.1016/j.econmod.2017.12.020
Nie, P. Y., Yang, Y. C., Chen, Y. H., & Wang, Z. H. (2016). How to subsidize energy efficiency under duopoly efficiently?. Applied Energy, 175, 31-39. https://doi.org/10.1016/j.apenergy.2016.04.105
Parker, G., & Van Alstyne, M. (2018). Innovation, openness, and platform control. Management Science, to appear. https://doi.org/10.1287/mnsc.2017.2757
Sacco, D., & Schmutzler, A. (2011). Is there a U-shaped relation between competition and investment. International Journal of Industrial Organization, 29(1), 65-73. https://doi.org/10.1016/j.ijindorg.2009.09.003
Shen, N., & Su, J. (2015). A comparison of different contract forms for consumers with switching costs and changed preferences. Economic Modelling, 50, 19-26. https://doi.org/10.1016/j.econmod.2015.05.014
Viard, B. (2007). Do switching costs make markets more or less competitive? The case of 800-number portability. RAND Journal of Economics, 38(1), 146-163. https://doi.org/10.1111/j.1756-2171.2007.tb00049.x
Vives, X. (2008). Innovation and competitive pressure. The Journal of Industrial Economics, 56(3), 419-469. https://doi.org/10.1111/j.1467-6451.2008.00356.x
Wang, C., Nie, P. Y., Peng, D. H., & Li, Z. H. (2017). Green insurance subsidy for promoting clean production innovation. Journal of Cleaner Production, 148, 111-117. https://doi.org/10.1016/j.jclepro.2017.01.145
Wang, R. Q., & Wen, Q. (1998). Strategic invasion in markets with switching costs, Journal of Economics and Management Strategy, 7(4), 521-549. https://doi.org/10.1162/105864098567506
Yang, Y. C., Nie, P. Y., Liu, H. T., & Shen, M. H. (2018). On the welfare effects of subsidy game for renewable energy investment: toward a dynamic equilibrium model. Renewable Energy, 121, 420-428. https://doi.org/10.1016/j.renene.2017.12.097
Yang, Y. C., & Nie, P. Y. (2015). R&D subsidies under asymmetric Cournot competition. Economic research-Ekonomska istraživanja, 28(1), 830-842. https://doi.org/10.1080/1331677X.2015.1088791