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

  • Viard, V. Brian

    (Stanford U)

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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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1773r3.

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Date of creation: Dec 2005
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Handle: RePEc:ecl:stabus:1773r3
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  1. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
  2. MacAvoy, Paul W, 1995. "Tacit Collusion under Regulation in the Pricing of Interstate Long-Distance Telephone Services," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 147-85, Summer.
  3. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-36, December.
  4. Steven A. Sharpe, 1992. "Consumer switching costs, market structure and prices: the theory and its application in the bank deposit market," Finance and Economics Discussion Series 183, Board of Governors of the Federal Reserve System (U.S.).
  5. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
  6. Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  8. Kaserman, David L. & Mayo, John W., 1991. "Competition for 800 service : An economic evaluation," Telecommunications Policy, Elsevier, vol. 15(5), pages 395-410, October.
  9. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  10. Kenneth G. Elzinga & David E. Mills, 1998. "Switching Costs in the Wholesale Distribution of Cigarettes," Southern Economic Journal, Southern Economic Association, vol. 65(2), pages 282-293, October.
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