Posted: March 1st, 2014

Economic Analysis Part 3/6

SwitchingCosts.Considerthefollowingsituation:Gobackto1996.Supposetherearetworivalonlinedatingsites.Thinkofthestrategicinteractionbetweentherespective firms.  Thetypical businessstrategyinvolves allowingmemberstomakeprofilesfor free,butthenchargingvarying amountstobeabletoviewotherprofiles,contactother members,etc.Firmsmayalsochoosetoallowadvertisersaccesstotheirsubscribers. Datingsitesareinsomesenseanexperiencegoodi.e.consumersdonottrulyknowthevalue,highorlow,untilafterpurchase.

1. Writedownthisgameusingalocationmodelofproductdifferentiation.You willuseyourmodeltoassistyourreasoningovertherestoftheexercise. Specifythingslikefirmlocationandconsumertransactioncosts.Writedown asimplepayofffunctionforeachfirmandfora typicalconsumer.
2. Whathappens intheinitial periodwhenthefirstbatchofconsumersare makingtheiradoptiondecisionandfirmsaretrying toattract consumers? Whatsort offirmbehaviordoyouexpecttoobserve?
3. Ascompetitionintensifies,firmsbecomeworriedaboutconsumersleavingtheir networkfortherival.Whatcanfirmsdotoavoidthis?

1. Nowitis2006,supposeultimatelyonefirmbuysout theother.Basedonyour answerin(a)and(c),shouldthefirmcontinuetooperatetwoseparatesites orshouldtheymerge?  Whatcanthemergedfirmdotoalleviateswitching costsintheeventthatitwishestopoolconsumers?

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