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