CS 891 - Economics of Information
Chapter 6 Summary: Managing Lock-In
Feb 22nd 2006
Presented by:
Amine Benjelloun (abenjell@cs.odu.edu)
Sumanth Mallipeddi (smallipe@cs.odu.edu)
The authors illustrate how lock-ins can be managed from both buyer’s and seller’s point
of 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 drain
your 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.
 Exploiting first mover advantage:
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?