Estimating Switching Costs for Heterogeneous Consumers: An Application to Wireless Number Portability

This paper uses household-level data of cellular usage to provide estimates of the implied switching costs that preclude consumers from switching providers in the face of competing offers. Our estimation differs from previous switching costs studies in that we are able to observe individual household choices of whether to switch, allowing us to explicitly account for consumer heterogeneity in our welfare estimates. This is critical because even if markets exhibit significant consumer switching, switching costs may affect competition in cases where consumers are heterogeneous in these costs. Based on a discrete choice model of the household’s provider choice, we estimate the total value to a household of switching providers, conditional on its characteristics, cellular usage and provider choice. Estimates of consumer surplus gains from the ability to switch providers are highly relevant to current wireless telecommunications policy. The Federal Communications Commission has mandated wireless number portability to take effect in November 2003, which will allow mobile phone subscribers to switch their service across wireless carriers without relinquishing their telephone number. Since there are other costs of switching unrelated to non-portability, such as early-termination fees or consumer time spent investigating calling plans, we provide an upper bound on the benefits of portability. Finally, we estimate counterfactual policy experiments of the effects of a decrease in switching costs on switching behavior. For a given set of post-portability prices we estimate the number of households that will switch and the aggregate welfare benefit of portability. These estimates can be compared to the expected cost of portability implementation provided by the cellular industry