Staff Working Paper No. 839
By Paolo Siciliani and Emanuele Giovannetti
The paper develops a static model to explore how, under platform competition, heterogeneous levels of switching costs can give rise to an incumbency advantage. The key condition required for the coexistence of both platforms on the market, to have effective competition, relies on the relative strength of switching costs over the network effects. Only when switching costs are stronger than cross-group network benefits is market tipping avoided. The same condition also underpins the presence of a material incumbency advantage vis-à-vis the entrant platform. Therefore, regulatory intervention aimed at facilitating switching, for example by imposing data portability, might worsen entry condition as the incumbent platform is less accommodative. Besides the standard configuration with exogenous singlehoming, we also fully characterise the model with endogenous multihoming on both sides. Partial multihoming occurs only on one side, the one with comparatively lower switching costs. However, in contrast to the seminal ‘competition bottleneck’ model, on the opposite side, where singlehoming arises endogenously, agents face higher prices than under exogenous singlehoming. Therefore, the incumbent platform would normally opt for this regime, whereas we show that the entrant is basically indifferent between the two.