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

Author

Listed:
  • 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," CEPR Discussion Papers 8693, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8693
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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, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    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.

    More about this item

    Keywords

    bundling; contracts; rollover; switching costs; telecommunications; telephone;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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