My industrial organization professor just informed me that the author of the article we read last week, Managing Lock-In (gated), is now the chief economist at Google. Yikes.

What happens when perfect competition meets lock-in? How can we reconcile vigorous competition, which eliminates excess profits, with lock-in, which makes an installed base a valuable asset? Think about the extreme (and unpleasant) case in which you face fierce competition from equally capable rivals to attract customers in the first place. Both you and your rivals know that each customer will be locked into whatever vendor he or she selects. The result is that competitition indeed wrings excess profits out of the market, but only on a life-cycle basis. The inescapable conclusion: firms will lose money (invest) in attracting customers, and (just) recoupe these investments from profitable sales to locked-in customers....

In our view, Kodak's revenues from the service business were simply economic returns on its deep discounts on initial sales in the highly competitive copier market. Just as industry participants should look at the entire lock-in cycle, so should the antitrust authorities and the courts.