The presence of choice does not equal the ability to make one. There can be lots of different brands available in a market, lots of choices available in an app store, and aggressive introductory prices offered by competitors, yet the cost of making a decision to switch can be prohibitive for consumers.
This is not to say that large companies are always bad, or that loyalty is a dangerous phenomenon. What is claimed is much narrower and empirically testable: when switching costs, network externalities, and compatibilities play an important role, competition in attracting customers may go hand in hand with the lack of competition among the chosen rivals.
The Paradox: Competition That Is Strong Before but Weak After
In standard price theory, a consumer who dislikes a product switches. In markets with switching costs, that logic breaks.
Klemperer described this in 1987. In his paper “Markets with Consumer Switching Costs,” Klemperer demonstrates how switching costs could be caused by the need to learn a new interface, transaction costs, penalties, or company-created incentives such as reward points. The result of this is that the customer base will be a source of future income. Firms may therefore compete aggressively for market share early on, anticipating that switching costs can make an established customer base more valuable over time (Klemperer, 1987c, p. 375).
A companion paper, “The Competitiveness of Markets with Switching Costs,” establishes the dynamic: initial discounts followed by higher prices once consumers are locked in. Crucially, Klemperer does not claim every price will be higher. The equilibrium depends on expectations, discount rates and the ability to price discriminate (Klemperer, 1987a, pp. 138–140).
This explains why observing low introductory prices is not evidence that a market will remain competitive. This is competition for the market rather than competition within the market.
The Mechanisms: Switching Costs, Network Effects and Ecosystems
Two mechanisms reinforce switching costs.
- a) Entry deterrence through installed base. Klemperer shows entrants face a double problem: they must match the incumbent’s product and compensate consumers for abandoning existing relationships. An incumbent’s customer base itself becomes a barrier (Klemperer, 1987b, p. 99).
- b) Network externalities. Katz and Shapiro show adoption depends not only on intrinsic quality but on compatibility, sponsorship and how many other users have adopted it. The value of “everyone else is already there” is an economic force. A technically superior product can lose if it is incompatible (Katz & Shapiro, 1986, p. 822).
Farrell and Klemperer integrate switching costs, network effects and compatibility in their synthesis of competition with switching costs and network effects. They explain that competition to become the market standard can be intense, yet incompatibility and lock-in can also weaken competition and prevent consumers from benefiting from superior alternatives (Farrell & Klemperer, 2007).
In modern-day platforms, this is magnified. Rochet, Tirole and Armstrong show platforms must attract two or more distinct groups: users, sellers, developers, advertisers, etc.
This implies that pricing cannot be analysed from a single perspective. The platform may be able to give free access to consumers yet earn from the business side, meaning zero price for consumers doesn’t necessarily mean lack of market power (Rochet and Tirole 990; Armstrong 668).
A network effect increases the value of the product. That is not inherently anticompetitive. The competitive question is whether the market remains contestable.
Value-Based Loyalty or Barrier-based Retention?
Destructive lock-in or healthy retention may be determined on the basis of an analytical question: Is the customer loyal to the existing incumbent due to continued delivery of better value or due to barriers to competing alternatives being cheaper and more effective? Loyalty alone cannot answer that. We need evidence on why consumers do not switch.
What Regulators Are Actually Doing
If theory shows what can happen, regulation shows what authorities are examining. A competitive law investigation is not necessarily an indication of infringement.
United Kingdom: The Furman Report recommended adaptations to the traditional framework and some pro-competitive measures to ensure proper competition and innovation (Furman et al. 12).
The UK Digital Markets, Competition and Consumers Act 2024 sets out a system for firms holding Strategic Market Status. It allows for conduct obligations and pro-competition interventions.
Two regulatory examples illustrate how authorities are addressing concerns about contestability and switching barriers:
The UK Competition and Markets Authority’s investigation into Microsoft’s business software ecosystem examines competition concerns relating to areas such as bundling, interoperability and default settings, including their implications for business customers’ ability to switch products. These concerns should be described as matters under investigation or consideration, rather than as established infringements, unless the relevant CMA decision expressly finds otherwise (Competition and Markets Authority [CMA], 2026).
European Union: The DMA operationalizes two remedies, which are often confused. Article 6(7) requires designated gatekeepers to provide effective interoperability, free of charge, to providers of services and hardware products in relation to specified hardware and software features accessed or controlled through the gatekeeper’s operating system, subject to the Regulation’s conditions.
Article 6(9) of the Digital Markets Act establishes obligations concerning end users’ effective portability of data provided by or generated through their use of a core platform service, subject to the conditions and scope set out in the Regulation (Regulation (EU) 2022/1925, art. 6(9)).
Data portability allows users to take their data with them, whereas interoperability enables other products or services to work with a platform. The European Commission’s 2025 specification decision concerning Apple’s interoperability obligations under the Digital Markets Act illustrates how broad statutory requirements can be translated into specific technical measures. The decision specifies how Apple should implement its obligations under Article 6(7); it should not itself be described as a finding of non-compliance or an imposition of a fine (European Commission, 2025).
The Indian Dimension
The same mechanisms appear in Indian market studies, with different market structures.
The CCI Market Study on E-Commerce examined consumer goods, accommodation and food services through secondary research, questionnaires and stakeholder discussions. It identifies competition-related issues in platform markets, including dependence of sellers on platforms. As a market study, it does not find that all identified practices violate the Competition Act (Competition Commission of India [CCI], 2020a).
The CCI’s telecom market study provides context on competition and market structure in India’s telecom sector. However, the extent to which its findings apply to software ecosystems depends on differences in market structure, switching processes and the nature of the services involved. Applying these observations to software markets is therefore an analytical comparison, rather than a direct finding of the telecom study (Competition Commission of India [CCI], 2020b).
The Indian legal doctrine is still the Competition Act, 2002 and its amendments. Under this act, the abuse of a dominant position is prohibited under Section 4, while anticompetitive agreements are addressed separately under Section 3 (Competition Act, 2002).
Conclusion
The number of nominal alternatives is an imperfect proxy for competition. With high switching costs, network effects, and incompatibility, it is possible to see intense competition for customers, along with low capacity of those customers to defect.
Thus, the thesis to defend is: competition policy should look not only at alternatives, but also at whether consumers can actually switch and whether rivals can compete with the incumbent.
This entails a change in evidentiary standards, from measures of market shares to measures of switching, multi-homing, usability of data portability, interoperability, and entry over time (Armstrong, 2006; European Parliament & Council of the European Union, 2022, art. 6(7); Organisation for Economic Co-operation and Development, 2021, 2022).
The objective is not to create frictionless switching in all cases. It is to provide consumers with credible alternatives and prevent firms from abusing their position to block such competition based on loyalty rather than barriers.
References
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