Tied Goods and Consumer Switching Costs

What are the implications of adopting a proprietary standard in a durable goods market? This paper shows that proprietary lens mounts tie digital cameras and lenses to the same brand, creating high consumer brand-switching costs and hurting firm profits and consumer surplus. I estimate a structural model of dynamic consumer demand and forward-looking firms setting committed long-run equilibrium prices, using detailed individual-level product-adoption data. I find that lens investments create consumer switching costs on the same order of magnitude as a new camera's price. These switching costs result in significant friction in consumer brand choice, give rise to market power in the secondary (lens) market, but lead to intense competition in the primary (camera) market. Introducing compatibility-a universal standard across firms-will benefit consumers and firms: firm profit increases by 13%-49%, favoring the smaller firm, and average consumer surplus increases by 12%.