IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v52y2006i1p27-38.html
   My bibliography  Save this article

Price Competition with Reduced Consumer Switching Costs: The Case of "Wireless Number Portability" in the Cellular Phone Industry

Author

Listed:
  • Mengze Shi

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • Jeongwen Chiang

    (Cheung Kong Graduate School of Business, Beijing, China, and Department of Marketing, National University of Singapore, Singapore 117592)

  • Byong-Duk Rhee

    (Department of Marketing, Whitman School of Management, Syracuse University, Syracuse, New York 13244)

Abstract

Wireless number portability (WNP) is a telecommunication regulatory policy that requires cellular phone service providers to allow customers who switch service subscriptions to retain their original phone numbers. The right to retain the number lowers the switching cost for a consumer. Thus, the purpose of the policy is to induce more competition and facilitate the growth of new or small service providers. In this paper, we show that WNP drives market price downward as expected but with a surprising twist--rather than helping the smaller firms grow, the policy may accelerate the process of market concentration. We find that the main contributing factor to this peculiarity is the discriminatory pricing scheme prevalent in the industry--that is, a service provider charges a lower per-minute fee for the calls initiated and received within the same network than for the calls connected across two networks. Under this pricing scheme, a consumer who subscribes to a larger network would benefit more than if subscribing to a smaller network, despite the relatively higher fixed access fee that the former may charge. By lowering the barrier of switching, WNP creates a market condition conducive for a larger network to gain market share. We support our analysis with the empirical evidence gathered from Hong Kong where WNP was adopted in March 1999.

Suggested Citation

  • Mengze Shi & Jeongwen Chiang & Byong-Duk Rhee, 2006. "Price Competition with Reduced Consumer Switching Costs: The Case of "Wireless Number Portability" in the Cellular Phone Industry," Management Science, INFORMS, vol. 52(1), pages 27-38, January.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:1:p:27-38
    DOI: 10.1287/mnsc.1050.0466
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1050.0466
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.1050.0466?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Philip M. Parker & Lars-Hendrik Roller, 1997. "Collusive Conduct in Duopolies: Multimarket Contact and Cross-Ownership in the Mobile Telephone Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 304-322, Summer.
    2. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    3. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference‐Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, June.
    4. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
    5. Armstrong, Mark, 1997. "Competition in Telecommunications," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 13(1), pages 64-82, Spring.
    6. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    7. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    8. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    9. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Suleymanova Irina & Wey Christian, 2011. "Bertrand Competition in Markets with Network Effects and Switching Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-58, September.
    2. Baraldi, A. Laura, 2008. "Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation," MPRA Paper 13373, University Library of Munich, Germany.
    3. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    4. Thomas, Catherine & Chen, Zhuoqiong (Charlie) & Stanton, Christopher T., 2020. "Information Spillovers in Experience Goods Competition," CEPR Discussion Papers 15255, C.E.P.R. Discussion Papers.
    5. Pei-Yu (Sharon) Chen & Lorin M. Hitt, 2002. "Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry," Information Systems Research, INFORMS, vol. 13(3), pages 255-274, September.
    6. Laura Rinaldi, 2008. "Estimation of network externalities and critical mass in the mobile telephone market: a panel data analysis of the OECD countries," Working Papers 1_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    7. Pot, Erik & Flesch, János & Peeters, Ronald & Vermeulen, Dries, 2013. "Dynamic competition with consumer inertia," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 355-366.
    8. Huang Rui & Perloff Jeffrey M & Villas-Boas Sofia B, 2006. "Effects of Sales on Brand Loyalty," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 4(1), pages 1-26, July.
    9. Krafft, Jackie & Salies, Evens, 2008. "The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case," Research Policy, Elsevier, vol. 37(4), pages 706-719, May.
    10. Anke Becker & Thomas Deckers & Thomas Dohmen & Armin Falk & Fabian Kosse, 2012. "The Relationship Between Economic Preferences and Psychological Personality Measures," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 453-478, July.
    11. De Bijl, Paul W. J. & Goyal, Sanjeev, 1995. "Technological change in markets with network externalities," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 307-325, September.
    12. Michal Grajek, 2002. "Identification of Network Externalities in Markets for Non-Durables," CIG Working Papers FS IV 02-32, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    13. Hess, Mike & Ricart, Joan E., 2002. "Managing customer switching costs: A framework for competing in the networked environment," IESE Research Papers D/472, IESE Business School.
    14. Doh-Shin Jeon & Domenico Menicucci, 2024. "Data portability and competition: Can data portability increase both consumer surplus and profits?," European Journal of Law and Economics, Springer, vol. 57(1), pages 145-162, April.
    15. 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).
    16. Guy Arie & Paul E. Grieco, 2014. "Who pays for switching costs?," Quantitative Marketing and Economics (QME), Springer, vol. 12(4), pages 379-419, December.
    17. Xuying Zhao & Hong Guo & Gangshu Cai & Subhajyoti Bandyopadhyay, 2021. "The Role of Expectation–Reality Discrepancy in Service Contracts," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4160-4175, November.
    18. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
    19. West, Joel, 2003. "How open is open enough?: Melding proprietary and open source platform strategies," Research Policy, Elsevier, vol. 32(7), pages 1259-1285, July.
    20. Deishin Lee & Haim Mendelson, 2007. "Adoption of Information Technology Under Network Effects," Information Systems Research, INFORMS, vol. 18(4), pages 395-413, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:52:y:2006:i:1:p:27-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.