Switching costs
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Switching costs are the costs or trouble a user faces in moving from one supplier to another. They can be money, time or effort. Examples are moving your data, losing your contacts or learning a new app. When switching is hard, users stay put even if a rival is better or cheaper. So switching costs "lock in" users and strengthen the market power of existing firms. They also act as a barrier to entry for new firms.
Example
A small business sells on one e-commerce platform. Its ratings, reviews and customer history cannot be carried to a rival platform. Moving means starting again from zero, so the seller stays even when commissions rise. This kind of "data lock-in" is what ONDC tries to reduce by separating buyer apps from seller apps.
Don't confuse with
- Transaction costs: the costs of making any exchange beyond the price, such as searching, negotiating and enforcing contracts. Switching costs are about leaving one supplier for another.
Related concepts
- Network effects
- Two-sided market
- Winner-takes-all market
- Gatekeeper platform
- Self-preferencing
- Anti-steering
- Deep discounting
- Killer acquisition