1 Security and Lock - In Tom

A customer experiences “lock-in” when the extra value it might obtain from a new supplier’s products or services is exceeded by the cost of switching from its current vendor. Customers may regret this state of affairs if they would have been better off having secured the alternative product from the start, or more simply, if the switching costs are substantially lower than the incremental value of the alternative supplier’s product (in which case, the customer will switch and capture the difference). Conversely, an incumbent supplier might appreciate and indeed encourage this state of affairs to the extent it can realize additional profit. These two interact in the sense that a supplier would likely forego additional profit (and a customer would receive lower prices) if switching costs were lower, even if the customer does not actually switch. Less apparently, though potentially more importantly, lock-in may have substantial impact on the types of product innovation a customer accesses, both directly from its supplier and indirectly through innovation in complementary products.