Emerging Tech

Product Innovation When Consumers Have Switching Costs

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Executive Summary

Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This paper concentrates on another factor that confers innovators with first-mover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, which must be duplicated for any new seller. In this paper, the authors list several components of switching costs that are relevant as regards to firm innovation behaviour.

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