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A Steady State Approach to a Network Externality Market With Switching Costs

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Abstract

We study duopoly pricing in the market for mobile phone service, which features network externalities, switching costs, and consumer heterogeneity. We introduce a steady state approach that enables a tractable analysis without endgame effects. The model can generate a variety of testable predictions, of which we focus on the comparative statics with respect to switching costs. Using data on the mobile phone service industries in 52 countries, we use the variation in market structure at the time switching costs were suddenly reduced by the regulatory imposition of mobile number portability (MNP). Firms that grew more rapidly prior to MNP respond to MNP by pricing more aggressively; firms facing large competitors respond less aggressively. Exploration of the model and its implications is an object of ongoing research.

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File URL: http://www.netinst.org/Keller_Miller_Wei_10-19.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 10-19.

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Length: 25 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:net:wpaper:1019

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Web page: http://www.NETinst.org/

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Keywords: Oligopoly; network externalities; switching costs; mobile number portability.;

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  1. Irina Suleymanova & Christian Wey, 2008. "Bertrand Competition in Markets with Network Effects and Switching Costs," Discussion Papers of DIW Berlin 796, DIW Berlin, German Institute for Economic Research.
  2. Doganoglu Toker & Grzybowski Lukasz, 2013. "Dynamic Duopoly Competition with Switching Costs and Network Externalities," Review of Network Economics, De Gruyter, vol. 12(1), pages 1-25, March.
  3. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521800952.
  4. Ashenfelter, Orley C, 1978. "Estimating the Effect of Training Programs on Earnings," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 47-57, February.
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