Thursday, May 30, 2013

Switching Costs and Competition

How resistant to switching phone carriers would you be if you had to change your phone number when you changed your carrier? If a lot, then carriers can raise price without as much fear that you will abandon them for a competitor. These switching costs make demand less elastic. In a new working paper, "The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare," Cho, Ferreira, and Telang show that:
... MNP intensified competition leading to an increase in consumer surplus. On average, the introduction of MNP decreased price by 7.9%. 

MNP policies were introduced despite strong objections from carriers and hastened the erosion of profits in the effected markets.

1 comment:

  1. Many people are disappointed that if they switch between cell phone carriers because they are afraid that they may lose their existing phones number. As more people are changing their mode of communication from land lines to mobile, the idea of telling their friends, colleagues and acquaintances their number has changed is cumbersome, resulting in people staying with their original carrier regardless of the cost of their network plans.
    Now a days, carriers cannot stop you from transferring your number to another carrier but you may have to pay a hefty termination fee and leave your old carrier open until the new carrier activates your number, in some cases it can take days to switch. Economically, if suppliers make it is easy for buyers to switch from carrier to carrier, then buyer power will tend to be higher. (Managerial Economics, Froeb, p. 116)

    Suzette McMillan, Empire State College, Dr. Singh, ECO-65155X