State Dependence at Internet Portals

36 Pages Posted: 8 May 2006

See all articles by Avi Goldfarb

Avi Goldfarb

University of Toronto - Rotman School of Management

Abstract

This study offers evidence of the existence of switching costs on the Internet. It uses more flexible methods than previously possible to separate switching costs from serially correlated unobservables at Internet portals. The data contain nearly 1,000 observations per household, allowing for household-specific regressions that control for all household-specific heterogeneity. The results show that households exhibit switching costs. The loyalty generated by these costs drives a large fraction of portal visits and generates considerable revenues; however, these revenues are not large enough to justify the losses incurred by Internet portals in the 1990s while building market share. The results also suggest that random coefficients models overestimate true state dependence. This study offers evidence of the existence of switching costs on the Internet. It uses more flexible methods than previously possible to separate switching costs from serially correlated unobservables at Internet portals. The data contain nearly 1,000 observations per household, allowing for household-specific regressions that control for all household-specific heterogeneity. The results show that households exhibit switching costs. The loyalty generated by these costs drives a large fraction of portal visits and generates considerable revenues; however, these revenues are not large enough to justify the losses incurred by Internet portals in the 1990s while building market share. The results also suggest that random coefficients models overestimate true state dependence.

Suggested Citation

Goldfarb, Avi, State Dependence at Internet Portals. Journal of Economics & Management Strategy, Vol. 15, No. 2, pp. 317-352, Summer 2006. Available at SSRN: https://ssrn.com/abstract=899186 or http://dx.doi.org/10.1111/j.1530-9134.2006.00102.x

Avi Goldfarb (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

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