CS 891 - Economics of Information

Chapter 6 Summary: Managing Lock-In

Feb 22nd2006

Presented by:

Amine Benjelloun ()

Sumanth Mallipeddi ()

The authors illustrate how lock-ins can be managed from both buyer’s and seller’s pointof view.Sellers hope to profit from locked-in buyers, while buyers seek to strengthen their bargain position by keeping their position open.Properly measuring switching costs before lock in could be worth of millions of dollars down the road.

Buyers

Bargain hard to end up with a good sweetener.

Be cautious regarding vague commitments and partial protections.

Keep your options open.

Sellers

Basic strategy dealing with lock in utilizes 3 key principles:

1- Invest:

It’s very easy in information business for the imitators to drive down the prices and drainyour installed base as they make products to minimize the switching costs.

  • Look ahead at the lock-in cycle:

Don’t try to make profits at the start of the cycle rather push your profits over the cycle.

  • Selling to influential customers:

By discounting to a big brand leader, you can capture the valuable business from others who will pay a premium to use your service.

  • Be wary of customers who switch often to exploit the introductory offer.

2- Entrench:

  • Entrenchment by design:

Give more value added information services to deepen your relationship with your customers.

  • Loyalty programs and cumulative discounts:

Vendors control buyers from switching with artificial loyalty programs.

3- Leverage:

  • Selling complimentary products:

Expand the set of complimentary products beyond those offered by your rival.

  • Selling access to your installed base:

You can gain more by selling access to your customers to other parties.

  • Attempts to raise search costs:

Make easy for the customers to find you.

  • Exploitingfirst moveradvantage:

First mover always enjoy huge installed base.

  • Controlling cycle length:

Strength of a chain depends on its weakest link, so try to extend (lock-in) before the contract expires.

  • Setting differential prices:

To Achieve Lock-In Keeping the record of customer information gives ability that gives you to tailor packages of products and prices to individual customer.

Discussion Questions for Chapter-6

Q.1 Do you support giving out the access to your customers to other online merchants? If so, what precautions should be needed?

Q-2 Say you are Sony, as a direct competitor to Apple, what steps would you take to enter the market with a new music player to attack the IPod?

Q-3 Imagine you are Apple, what steps would you take to hold your existing customers and to attract the rival’s as well as the new customers?