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Welfare Effects of Switching Barriers Through Permanence Clauses: Evidence from the Mobiles Market in Colombia

Author

Listed:
  • Álvaro Riascos

    ()

  • Juan David Martín

    ()

  • Natalia Serna

    ()

Abstract

During 2014, the Comisión de Regulación de Comunicaciones in Colombia enacted a Resolution by which permanence clauses or fixed-length terms in mobile telecommunications contracts were prohibited for network operators offering bundled mobile terminals and voice plans. Prohibition was enacted under the argument permanence clauses create switching costs, reduce competition, and generate information asymmetries. In this study we measure the impact of the Resolution on consumer, firm, and social welfare by estimating the structural demand for mobile terminals and conducting two counterfactual scenarios. We show switching costs by means of permanence clauses reduce consumer utility and increase the variance of the utility distribution. We also show the Colombian market for mobile terminals has been better off without permanence clauses, with both consumers and firms experiencing gains from the prohibition. However, variation in firm surplus is explained mostly by the variation in profits of incumbent network operators than by the variation in profits of firms selling terminals at cash price. Our study contributes to the literature of bundled sales and switching costs and is crucial from the perspective of regulation and industrial policy in the telecommunications sector.

Suggested Citation

  • Álvaro Riascos & Juan David Martín & Natalia Serna, 2017. "Welfare Effects of Switching Barriers Through Permanence Clauses: Evidence from the Mobiles Market in Colombia," DOCUMENTOS DE TRABAJO QUANTIL 016418, QUANTIL.
  • Handle: RePEc:col:000508:016418
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    References listed on IDEAS

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    1. Lee, Jongsu & Kim, Yeonbae & Lee, Jeong-Dong & Park, Yuri, 2006. "Estimating the extent of potential competition in the Korean mobile telecommunications market: Switching costs and number portability," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 107-124, January.
    2. Crawford, Gregory S. & Cullen, Joseph, 2007. "Bundling, product choice, and efficiency: Should cable television networks be offered a la carte?," Information Economics and Policy, Elsevier, vol. 19(3-4), pages 379-404, October.
    3. Tim Burnett, 2014. "The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets," The Centre for Market and Public Organisation 14/321, Department of Economics, University of Bristol, UK.
    4. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-685, April.
    5. Gregory S. Crawford & Oleksandr Shcherbakov & Matthew Shum, 2015. "The welfare effects of endogenous quality choice in cable television markets," ECON - Working Papers 202, Department of Economics - University of Zurich.
    6. Eugenio J. Miravete, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 943-971.
    7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    8. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    9. Economides, Nicholas, 1999. "The Telecommunications Act of 1996 and its impact1," Japan and the World Economy, Elsevier, vol. 11(4), pages 455-483, December.
    10. Yannis Bakos & Erik Brynjolfsson, 2000. "Bundling and Competition on the Internet," Marketing Science, INFORMS, vol. 19(1), pages 63-82, May.
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    More about this item

    Keywords

    switching costs; permanence clauses; structural demand; telecommunications; fixed-length contracts;

    JEL classification:

    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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