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The Impact of “Rollover” Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data

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  • Crawford, Gregory S.
  • Tosini, Nicola
  • Waehrer, Keith

Abstract

In February 2008, British Telecommunications (BT) introduced automatically renewing, or “rollover”, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts in media and telecommunications markets.

Suggested Citation

  • Crawford, Gregory S. & Tosini, Nicola & Waehrer, Keith, 2011. "The Impact of “Rollover” Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data," Economic Research Papers 270744, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:270744
    DOI: 10.22004/ag.econ.270744
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    Cited by:

    1. Stephanie Lee, 2017. "Does Bundling Decrease the Probability of Switching Telecommunications Service Providers?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(3), pages 303-322, May.
    2. Deuflhard, Florian, 2018. "Quantifying inertia in retail deposit markets," SAFE Working Paper Series 223, Leibniz Institute for Financial Research SAFE.
    3. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    4. Mitja Kovač & Ann-Sophie Vandenberghe, 2015. "Regulation of Automatic Renewal Clauses: A Behavioural Law and Economics Approach," Journal of Consumer Policy, Springer, vol. 38(3), pages 287-313, September.
    5. Benjamin R. Handel, 2011. "Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts," NBER Working Papers 17459, National Bureau of Economic Research, Inc.

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    Keywords

    Financial Economics;

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