Economic Analysis Part 3/6

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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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