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

Price Competition with Reduced Consumer Switching Costs: The Case of Wireless Number Portability... 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 twistrather 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 industrythat 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

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

Management Science , Volume 52 (1): 12 – Jan 6, 2006
12 pages

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Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article - Special Issue on Incentives and Coordination in Operations Management
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.1050.0466
Publisher site
See Article on Publisher Site

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 twistrather 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 industrythat 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.

Journal

Management ScienceINFORMS

Published: Jan 6, 2006

Keywords: Keywords : switching costs ; number portability ; price discrimination ; network externality

References