Switching Costs and Network Effects In the Market for Routers and Switches

This research examines the impact of switching costs on vendor choice in the market for routers and switches. We show that despite the use of open standards which attempt to enhance interoperabilities for equipments from different vendors, vendors in this market are able to maintain high switching costs. Because routers and switches are networked goods, switching costs may arise from prior investments made at the same establishment and/or at other establishments within the same firm. We study how the introduction of switches into the LAN market affected vendor choice in routers. In particular, we provide evidence of significant cross-product switching costs and sizeable shopping costs when buyers purchase routers and switches simultaneously. However, we also show that the introduction of switches may have temporarily reduced switching costs for router buyers investing in switches. We thank Mark Doms, Avi Goldfarb, Shane Greenstein, Lorin Hitt, Mike Mazzeo, Sandy Slaughter, Michael Smith and seminar participants at Carnegie Mellon and the 2002 International Conference on Information Systems for helpful comments and suggestions. Tim Ward and Harry Georgopolous provided helpful technical expertise on computer networking equipment. We thank the General Motors Strategy Center and the NET (Networks, Electronic Commerce, and Telecommunications) Institute for financial support, and Harte Hanks Market Intelligence for providing essential data. All errors are our own.