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

Author

Listed:
  • Nicoletta Corrocher

    (CESPRI, Università Bocconi, Milano)

  • Lorenzo Zirulia

    (CESPRI, Università Bocconi, Milano)

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.

Suggested Citation

  • Nicoletta Corrocher & Lorenzo Zirulia, 2005. "Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry," KITeS Working Papers 166, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised May 2005.
  • Handle: RePEc:cri:cespri:wp166
    as

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    File URL: ftp://ftp.unibocconi.it/pub/RePEc/cri/papers/WP166CorrocherZirulia.pdf
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    References listed on IDEAS

    as
    1. Valletti, Tommaso M & Cave, Martin, 1998. "Competition in UK mobile communications," Telecommunications Policy, Elsevier, vol. 22(2), pages 109-131, March.
    2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
    3. 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 176-183, May.
    4. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 529-562, Winter.
    5. Valletti, Tommaso M., 2000. "Price discrimination and price dispersion in a duopoly," Research in Economics, Elsevier, vol. 54(4), pages 351-374, December.
    6. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, June.
    7. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
    8. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
    9. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    10. 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.
    11. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
    12. Valletti, Tommaso M., 1999. "A model of competition in mobile communications," Information Economics and Policy, Elsevier, vol. 11(1), pages 61-72, March.
    13. Tommaso Valletti, 2003. "Is Mobile Telephony a Natural Oligopoly?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 22(1), pages 47-65, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Switching costs; Price discrimination; Mobile communications;

    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

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