Posted by Social Science Research Network
By Georg Clemens (Compass Lexecon) & Mutlu Özcan (Chair of Applied Microeconomics)
Abstract: This article analyses switching behavior in messaging service markets. WhatsApp’s decision to start forwarding customer data to Facebook outraged its customer base. Our model explains why, despite this outrage, switching to a rival network that does not collect data failed. In a market with network effects, where consumers either perceive excessive data collection as a dis-utility (“sophisticates”) or not (“naives”), an incumbent network refrains from collecting data until all customers joined. When naives join the incumbent’s network they never switch. The entrant network will thus be too small to compete with the incumbent who ultimately remains dominant, as the Facebook/WhatsApp case shows.