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Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry

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Author Info
Nicoletta Corrocher (CESPRI, Università Bocconi, Milano)
Lorenzo Zirulia (CESPRI, Università Bocconi, Milano)

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Abstract

In this paper we develop a formal model that captures some basic features of competition in the mobile communications service industry. In a model of oligopolistic competition with price discrimination and switching costs, we study the role of firms’ installed base of consumers in providing the incentives to offer contracts for a new class of consumers with a lower willingness to pay. The model predicts that there exists an inverse relationship between the share of the leader in the market of consumers with high willingness to pay and its share in the market of consumers with low willingness to pay. This implies that market shares converge. If firms collude in the introduction of new contracts, convergence is milder. This result is consistent with the empirical evidence related to the mobile communications industry in different European countries, where we observe a convergence in market shares driven by the superior ability of followers to acquire new customers, who typically have lower willingness to pay as compared with early adopters.

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Publisher Info
Paper provided by CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy in its series CESPRI Working Papers with number 166.

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Length: 20 pages
Date of creation: May 2005
Date of revision: May 2005
Handle: RePEc:cri:cespri:wp166

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Related research
Keywords: Switching costs Price discrimination Mobile communications

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(4), pages 529-62, Winter.
  2. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany. [Downloadable!]
  3. Valletti, Tommaso M., 2000. "Price discrimination and price dispersion in a duopoly," Research in Economics, Elsevier, vol. 54(4), pages 351-374, December. [Downloadable!] (restricted)
  4. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 405-20, July. [Downloadable!] (restricted)
  5. Gabrielsen, Tommy Staahl & Vagstad, Steinar, 2003. "Consumer heterogeneity, incomplete information and pricing in a duopoly with switching costs," Information Economics and Policy, Elsevier, vol. 15(3), pages 384-401, September. [Downloadable!] (restricted)
  6. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May. [Downloadable!] (restricted)
    Other versions:
  7. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-83, May. [Downloadable!] (restricted)
  9. Valletti, Tommaso M., 1999. "A model of competition in mobile communications," Information Economics and Policy, Elsevier, vol. 11(1), pages 61-72, March. [Downloadable!] (restricted)
  10. Tommaso Valletti, 2003. "Is Mobile Telephony a Natural Oligopoly?," Review of Industrial Organization, Springer, vol. 22(1), pages 47-65, February. [Downloadable!] (restricted)
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