Switching barriers

Switching barriers or switching costs are terms used in microeconomics , strategic management , and marketing to describe Any impediment to a customer ‘s changing of suppliers ( customer switching ).


The definition of switching costs is quite broad. Thompson and Cats-Baril (2002) citation needed ] olefins switching costs as ” the costs associated with switching beg “, while Farrell and Klemperer (2007) write That ” a consumer faces a switching cost entre sellers When an investment- specific à son current must be duplicated for a new seller “. These terms indicate, switching costs can arise for several reasons.

Examples of switching costs include the following: costs related to learning how to use the interface of a new mobile phone from a different brand ; When a new electricity provider is involved, it is necessary to provide a new electricity supplier.

Types of switching costs include exit fees, search costs, learning costs, cognitive effort, emotional costs, equipment costs, installation and start-up costs, financial risk , psychological risk, and social risk . In the marketing literature, customers face three types of switching costs: (1) financial switching costs (eg, fees to break contract, lost reward points ); (2) procedural switching costs (time, effort, and uncertainty in locating, adopting, and using a new brand / provider); and (3) relational switching costs (personal relationships and identification with brand and employees).

Some of these costs are easy to estimate. Exit fees include contractual obligations that must be paid to the current supplier and compensatory damages that may be awarded for breach of contract . Often, vendors combines sign-up incentives with penalties for early cancellation. Careful buyers who read the fine print should not be surprised by exit fees. Search costs and learning costs, the effort and expense required to find an alternative, are also usually expected.

On the other hand, the psychological, emotional, and social costs of being overlooked or underestimated by both buyers and sellers. Gourville (2003) lists many rules of thumb to help understand why many consumers do not immediately switch from one product to another. 1) People are sensitive to the relative advantages and disadvantages of any change of the status quo . Therefore, a new product, no matter how great it is on its own merit, must be significantly better than what the consumer is currently using. 2) Different people have different reference points. For example, a high-tech traveling salesman would evaluate the advantages of amobile phone over a landlinephone from a much different perspective than a homebound, fixed-income withdrawe. 3) People exhibit loss aversion . The bread of giving up a benefit is much more significant than the pleasure of gaining that benefit. For example, DIVX technology may have failed, in part, because it has been offered to the consumer without compensation to the perceived sacrifice of unlimited viewing time and the cost of having to hook into a telephone line.

Switching costs are a major reason for pursuing order-of-magnitude improvements in costs, efficiencies, and benefits to the consumer. This business strategy has been called Andy Grove’s 10x rule.

Where switching costs for a buyer are prohibitively high, the status Can Be Modeled as a monopoly , for a seller, has monopsony , and for both, a bilateral monopoly .

Shalev and Asbjornsen found that switching costs are not relevant to public sector procurement. Public sector sales are expiring. Given that we can not avoid these discounts [1]

Competition, collective switching costs, market performance

Switching costs affect competition . When a consumer faces switching costs, the rational consumer will not switch to the begging Offering the lowest price if the switching costs in terms of monetary cost, stress, time, uncertainty, and other Reasons, outweigh the price differential entre les two suppliers. If this happens, the consumer is said to be locked-in to the supplier. If a pleading marriages to lock-in Consumers, the begging can raise prices to a certain extent without fear of losing customers Because The additional effects of lock-in (time, effort, etc.) prevent prevention the consumer from switching.

QWERTY example

Competition is also affected by collective switching costs, especially in markets with strong network effects . Collective switching costs are the combined switching costs of all users in a particular market. For example, the QWERTYkeyboard layout presents the difficulty of collective switching costs and the problems associated with co-ordinating an escape from a collective lock-in. Since it has been adopted, alternate keyboard layouts have been developed and used (eg the Dvorak layout). Individuals and firms who perceive an effective and efficient way of working.

QWERTY because it dominates the keyboard layout market. QWERTY and other users QWERTY QWERTY users and switching to other users

Collective switching costs affect competition by strengthening incumbents and hindering new entrants, who must overcome both the collective and individual switching costs to be able to succeed in the market. Alternative Layout Keyboard layouts citation needed ] which lower the barrier to entry by retaining many of the features of QWERTY. However, none of them is in general use.

Switching costs are likely to be present in a large class of markets . The importance of understanding switching costs has been emphasized in the light of information technology , which is particularly important in the information economy . Shapiro and Varian (1999) write: “[y] or just can not compete effectively in the information economy unless you know how to identify, measure, and understand switching costs and map strategy accordingly.” Businesses are not only the ones who need to be aware of and understand switching costs. Since switching costs affect market performance, governments and regulators also have incentives to understand switching costs.

See also

  • Barriers to entry
  • Barriers to exit
  • Job lock
  • Wear 5 forces analysis
  • Transaction cost
  • Vendor lock-in


  1. Jump up^ Shalev, Moshe Eitan; Asbjornsen, Stee (2010). “Electronic Reverse Auctions and the Public Sector – Factors of Success”. Journal of Public Procurement . 10 (3): 428-452. SSRN  1727409  .