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Do Switching Costs Make Markets More or Less Competitive? The Case of 800-Number Portability

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  • Viard, V. Brian

    (Stanford U)

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    Abstract

    Do switching costs reduce or intensify price competition if firms charge the same price to old and new consumers? I study 800-number portability to determine whether switching costs intensify price competition under a single price regime. Before portability, a customer had to change toll-free numbers in order to change service providers. In May 1993, 800-numbers became portable, under a regulatory regime that precluded price discrimination between old and new consumers. AT&T and MCI reduced their toll-free services prices in response to portability, implying that the elimination of switching costs made the market more competitive. Despite rapid growth in toll-free services, gains from higher prices to "locked-in" consumers exceeded the incentives to capture new consumers. Prices on larger contracts dropped more, consistent with greater lock-in for larger users. Price changes after portability's announcement but before implementation are consistent with rational expectations.

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    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1773r3.

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    Date of creation: Dec 2005
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    Handle: RePEc:ecl:stabus:1773r3

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    1. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
    2. Kenneth G. Elzinga & David E. Mills, 1998. "Switching Costs in the Wholesale Distribution of Cigarettes," Southern Economic Journal, Southern Economic Association, vol. 65(2), pages 282-293, October.
    3. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
    4. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
    5. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    6. Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
    7. Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Kaserman, David L. & Mayo, John W., 1991. "Competition for 800 service : An economic evaluation," Telecommunications Policy, Elsevier, vol. 15(5), pages 395-410, October.
    9. MacAvoy, Paul W, 1995. "Tacit Collusion under Regulation in the Pricing of Interstate Long-Distance Telephone Services," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 147-85, Summer.
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    Cited by:
    1. Lukasz Grzybowski & Pedro Pereira, 2007. "Merger Simulation in Mobile Telephony in Portugal," Review of Industrial Organization, Springer, vol. 31(3), pages 205-220, November.
    2. Lukasz Grzybowski & Pedro Pereira, 2011. "Subscription Choices and Switching Costs in Mobile Telephony," Review of Industrial Organization, Springer, vol. 38(1), pages 23-42, January.

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