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Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone

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Abstract

Since the Apple iPhone’s first launch in 2007 with an exclusive arrangement with AT&T, it has garnered overwhelmingly positive responses from consumers and from the media. With its success, exclusive contracts between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. Such practices have been criticized by regulators, by the media, and by “locked-out” consumers, due to the fact that a consumer has to subscribe to a particular service provider if he or she strongly prefers one handset to others. In this paper, we empirically examine the impact of handset exclusivity arrangements on consumer welfare. First we study consumers’ purchase decisions in mobile services that include the choice of a handset and of a service provider. We do so by combining survey data on consumers’ purchase decisions with supplemented data on prices and features of common handsets. Next, assuming a Stackelberg leader-follower relationship between the handset manufacturers and the service providers, and using our demand estimates, we recover the marginal costs for the players in the market. We then simulate what would have happened in the counterfactual scenario when the iPhone is available from all carriers. Our results suggest that, if we take into account price adjustments from handset manufacturers and service providers in response to the change in market structure, consumer welfare will increase by $326 million without the exclusive arrangement. We view our analysis as a starting point to a more complete characterization of consumer behavior and the complex relationships among players in this industry.

Suggested Citation

  • Ting Zhu & Hongju Liu & Pradeep Chintagunta, 2011. "Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone," Working Papers 11-35, NET Institute, revised Oct 2011.
  • Handle: RePEc:net:wpaper:1135
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    Cited by:

    1. Joachim Freyberger & Bradley J. Larsen, 2022. "Identification in ascending auctions, with an application to digital rights management," Quantitative Economics, Econometric Society, vol. 13(2), pages 505-543, May.
    2. Ying Fan & Ge Zhang, 2021. "The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones," NBER Working Papers 28659, National Bureau of Economic Research, Inc.
    3. Glenn A. Woroch, 2020. "Spectrum Concentration and Performance of the U.S. Wireless Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(1), pages 73-105, February.
    4. Ying Fan & Ge Zhang, 2022. "The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 429-449, June.
    5. Yue Liu & Rong Luo, 2023. "Network Effects and Multinetwork Sellers’ Dynamic Pricing in the U.S. Smartphone Market," Management Science, INFORMS, vol. 69(6), pages 3297-3318, June.
    6. Bonani, Michela, 2023. "Essays on innovation, cooperation, and competition under standardization," Other publications TiSEM 1c87d7fc-2c24-430a-9d4e-1, Tilburg University, School of Economics and Management.
    7. Hu, Jing & Hu, Qiying & Xia, Yusen, 2019. "Who should invest in cost reduction in supply chains?," International Journal of Production Economics, Elsevier, vol. 207(C), pages 1-18.
    8. Cambra-Fierro, Jesús & Gao, Lily (Xuehui) & Melero-Polo, Iguácel & Trifu, Andreea, 2021. "How do firms handle variability in customer experience? A dynamic approach to better understanding customer retention," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    9. Woroch, Glenn A, 2020. "Spectrum Concentration and Performance of the U.S. Wireless Industry," Department of Economics, Working Paper Series qt8vv381jt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    10. Joan Calzada & Fernando Martínez-Santos, 2016. "Pricing strategies and competition in the mobile broadband market," Journal of Regulatory Economics, Springer, vol. 50(1), pages 70-98, August.

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    More about this item

    Keywords

    Exclusive Arrangement; Distribution Channels; Wireless Service;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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