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Switching Costs and Network Effects – How Much Do they Really Matter in Mobile Telecommunications?

Author

Listed:
  • Mikołaj Czajkowski

    () (Faculty of Economic Sciences, University of Warsaw)

  • Maciej Sobolewski

    () (Faculty of Economic Sciences, University of Warsaw)

Abstract

Our study focuses on the identification and the measurement of switching costs and network effects in mobile telecommunications. Although these two phenomena create similar consumer lock-in mechanisms, there are no empirical studies that integrate them into one model of subscriber’s behavior. Our study fills this gap by applying stated preference valuation methods to a representative sample of individual mobile phone users in Poland. We find that number portability can be attributed to only approximately 50% of the total switching costs associated with changing either the provider or the service and the remaining part is associated with status quo inertia. Additionally, we show that because network effects play an important role in service valuation, they lead to strengthening the lock-in mechanisms even further. Our study provides the first empirical measurements of the relative importance of these simultaneous effects and provides the estimates of their monetary value.

Suggested Citation

  • Mikołaj Czajkowski & Maciej Sobolewski, 2013. "Switching Costs and Network Effects – How Much Do they Really Matter in Mobile Telecommunications?," Working Papers 2013-29, Faculty of Economic Sciences, University of Warsaw.
  • Handle: RePEc:war:wpaper:2013-29
    as

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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP114.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
    1. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco.
    2. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    3. Sobolewski, Maciej & Czajkowski, MikoŁaj, 2012. "Network effects and preference heterogeneity in the case of mobile telecommunications markets," Telecommunications Policy, Elsevier, vol. 36(3), pages 197-211.
    4. Liikanen, Jukka & Stoneman, Paul & Toivanen, Otto, 2004. "Intergenerational effects in the diffusion of new technology: the case of mobile phones," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1137-1154, November.
    5. Lee, Jongsu & Kim, Yeonbae & Lee, Jeong-Dong & Park, Yuri, 2006. "Estimating the extent of potential competition in the Korean mobile telecommunications market: Switching costs and number portability," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 107-124, January.
    6. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, December.
    7. Ferrini, Silvia & Scarpa, Riccardo, 2007. "Designs with a priori information for nonmarket valuation with choice experiments: A Monte Carlo study," Journal of Environmental Economics and Management, Elsevier, vol. 53(3), pages 342-363, May.
    8. Michal Grajek, 2003. "Estimating Network Effects and Compatibility in Mobile Telecommunications," CIG Working Papers SP II 2003-26, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    9. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
    10. Kim, Hee-Su & Kwon, Namhoon, 2003. "The advantage of network size in acquiring new subscribers: a conditional logit analysis of the Korean mobile telephony market," Information Economics and Policy, Elsevier, vol. 15(1), pages 17-33, March.
    11. Miko?aj Czajkowski & Maciej Sobolewski, 2011. "Measuring network effects in mobile telecommunications markets with stated-preference valuation methods," International Journal of Management and Network Economics, Inderscience Enterprises Ltd, vol. 2(2), pages 197-215.
    12. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    13. Sean Lyons, 2006. "Measuring the Benefits of Mobile Number Portability," Trinity Economics Papers tep2009, Trinity College Dublin, Department of Economics.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Switching costs; network effects; mobile telecommunications; mobile number portability; brand valuation; stated preference; non-market valuation; discrete choice experiment; random parameters multinomial logit model;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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