A Structural Analysis for Consumer's Dynamic Switching Decision in the Cellular Service Industry

This paper develops an empirical framework to analyze consumer’s dynamic switching decision in the cellular service industry. It first incorporates the sequential problem of quantity, plan and firm subscription choice in the presence of switching costs into a dynamic structural model, which allows for fully heterogeneous consumers and multiple switching possibilities across networks. The model is estimated using the data set on the number of switching consumers and the evolution of observed plan/firm characteristics over time. Based on the BLP-style estimation methods, we combine a nested technique that uses parametric assumptions with the structural estimation algorithm. The magnitude of switching costs is estimated and the impact of number portability is evaluated. A dynamic model with restricted number of switching is likely to underestimate the switching costs. I find that future expectations affect consumers' optimal timing of switching. Change in the variety of optional plans and plan qualities play a great role in the consumer switching decision. I also find that the pattern of switching rates which we observed after number portability is attributed more to decrease in the prices and increase in the product qualities than decrease in the magnitude of switching costs.