I develop an empirical framework to disentangle different sources of consumer inertia in the US wireless industry. The use of a detailed data set allows me to identify preference heterogeneity from consumer type-specific market shares and switchingcosts from churn rates. Identification of a localized network effect comes from comparing the dynamics of distinct local markets. The central condition for identification is that neither the characteristics defining consumer heterogeneity nor the characteristics defining reference groups are a (weak) subset of the other. Being able to separate switchingcosts and network effects is important as both can lead to inefficient consumer inertia, but depending on its sources policy implications may be very different. Estimates of switchingcosts range from US-$ 316 to US-$ 630. The willingness to pay for a 20%-point increase in an operator’s market share is on average US-$ 22 per month. My counterfactuals illustrate that both effects are important determinants of consumers’ price elasticities potentially translating into market power that helps large carriers in defending their dominant position.
In the context of telecommunications switchingcosts have been analyzed in numerous papers dealing mainly with number portability. ( Viard 2007 ) shows that introduction of 0-800 number portability in US reduced wholesale prices by 4.4%. ( Lyons 2010 ) based on panel data from several countries estimates the price reduction resulting from mobile number portability at 7% and argues that MNP is effective only if porting time is less than 5 days. Two papers use similar modeling approach to ours and estimate monetary value of number portability for Korea (Lee, Kim et al. 2006) and Japan ( Nakamura 2008 ) at about 10 euro, but without controlling for network effects in their choice designs. ( Nakamura 2010 ) uses discrete choice experiment to model portability of content and handsets across service platforms of different operators. ( Grzybowski and Pereira 2011 ) use individual panel data to analyze subscription choices for Portugal. They show that switchingcosts largely affect choice probabilities and also that price mediated network effects mitigate the impact of switching cots on market structure.
The three postal Directives maintain the universal postal service (UPS), from which the universal service obligations (USOs) are derived, beyond the full market opening (FMO). Keeping the USOs may well put the universal service provider (USP) economic equilibrium in danger, and hence, the Directives design mechanisms in order to finance the additional costs of such USOs: (i) a mechanism to compensate the undertaking concerned from public funds or (ii) a mechanism for the sharing of the net costs of the universal service obligations between providers of services and/or users. The UPS extends to a set of high-quality postal services with which all users are permanently provided at an affordable price throughout the territory. The USP must assume the USOs. These can work as a retention mechanism on the part of providers, and can strengthen switchingcosts because many of the customers wishing to switch providers need to return to their incumbent provider for some aspect of their mail services. This is due to the potentially incomplete territorial network coverage of an entrant who has not offered UPS or due to inefficiencies in the access regulations of the postal network. Eighteen years after the first directive, the opening of the postal market in the main EU states has not reached the levels expected in the ambitious liberalization process. The USPs that existed before the liberalization process had still retained a high market share, approximately 90 per cent, in terms of main postal products. Furthermore, as pointed out by Jonsson and Selander (2006) and Pateiro et al (2013a; 2013b), some entry attempts have only reached very low market shares or even failed. Though the markets will be open to competition, the lack of legal restrictions to competition does not mean that competition will be present (Okholm et al 2010: 80). For example, although the markets of Estonia, Finland, Germany, Spain, Sweden, and the United Kingdom (UK) are fully liberalized legally, the actual competition level in these countries is low or has been undisclosed. The dominant provider continues to hold dominance in correspondence and direct mail segment (more than 90 per cent) in most of the European markets: Germany, Hungary, Iceland, Luxembourg, Netherlands, Spain, Portugal, Slovenia, and Slovakia. The most competitive markets are unaddressed delivery and parcel (about 50 per cent). Historically, these are the markets where competition has been allowed for the longest period of time.
The first case concerns the energy market of liquefied petroleum gas (LPG). The incum- bent firms implemented lock-in agreements with their consumers in the market growth phase. These lock-in agreements have tied the owner ship of the pressure vessel with an exclusive purchasing obligation of repeated LPG supply from the incumbent firm. The lock-in agreements have foreseen a rent for the pressure vessel which covers the invest- ment costs of the pressure vessel. The additional exclusive purchasing obligation has the anticompetitive effect of foreclosing the locked-in consumer group from each other due to artificial switchingcosts in case of terminating the lock-in agreement. The artificial switchingcosts are triggered by ownership rights of the incumbent firms to enforce the return of the rented pressure vessel without the possibility to purchase the pressure ves- sel from the incumbent firm. This market constellation is similar to the decision of the European General Court (2003) in Van den Bergh Foods Ltd vs. European Commission (T- 65/98). According to the European General Court is the implementation of a rent less anticompetitive compared to an exclusive purchasing obligation. In presence of a rent there is no justification for an exclusive purchasing obligation by a dominant firm. The implementations of exclusive purchasing obligations are prohibited for a dominant firm; hence, the same prohibition should be applied in case of collective dominance. While the determination of single dominance is straight forward under Article 102 TFEU, the same anticompetitive effect leads to contradicting results in the case of collective dominance between the applications of the Airtours Criteria (Article 102 TFEU) versus the Cumulative Effect Doctrine (Article 101 TFEU).
Fig. 4: Separate effect of decreasing transaction costs against switchingcosts for overlapped and non-overlapped network topologies.
Fig. 5: Effect of decreasing both costs for overlapped and non-overlapped network topologies. Fig. 5 shows that efficiency is attained more quickly in a case, in which both costs are reduced at the same time. This figure corroborates the non-overlapping topology attains higher efficiency than an overlapped one, when reducing both costs. This fact highlights the importance of infrastructure cooperation for attaining higher levels of efficiency. In addition, this figure evidences the resulting effect on market performance for both cost reductions. In fact, an operator-driven strategy increases the level of traded capacity and investment and a user-driven strategy increases retail competition and decreases prices. Especially interesting are the development of traded capacity and churn rate curves. While traded capacity achieves a high level at medium switching and low transaction costs, churn rate radically increases at low switching and transaction costs at traded capacity expenses. Even though that the magnitude of this change may depend on a particular user-driven or operator- driven technology, this evidences the high impact that one or other technology may have on the market performance by driving a retail competition or a wholesale trading.
This paper analyzes how the strategic use of switchingcosts by an incumbent influences entry, price competition and the entrant's incentive to introduce a high quality product, in a market with vertically differentiated goods. We can prove the existence of a unique subgame perfect equilibrium whose characteristics depends on the costs of developing quality. If these costs are low, the entrant strongly differentiates its product and price competition is tougher than without switchingcosts. If the costs of product's quality are in the middle range, the entrant differentiates its product less and each firm specializes on a group of customers. This implies a less competitive industry since both suppliers have market power over their purchasers. If the costs of differentiation are high enough, entry is deterred through the strategic use of switchingcosts. Furthermore we can show that the entrant always underinvests in quality when compared to the case of no switchingcosts. The equilibrium outcome is inefficient, since total welfare decreases in the presence of switchingcosts. Policy suggestions are discussed.
Abstract: The EOQ repair and waste disposal problem was studied first
by Richter, 1997. A first shop is providing a homogeneous product used by a second shop at a constant demand rate. The first shop is manufacturing new products and it is also repairing products used by a second shop, which are then regarded as being as good as new. The products are employed by a second shop and collected there according to a repair rate. The other products are immediately disposed of as waste. At the end of some period of time, the collected products are brought back to the first shop and will be stored as long as necessary and then repaired. If the repaired products are finished, the manufacturing process starts to cover the remaining demand for the time interval. The model was extended by Saadany and Jaber, 2008 to the problem of minimizing the total cost of production, remanufacturing and inventory while incorporating additional switchingcosts. The switching cost is incurred when the process shifts from repair to production and from production to repair. However, in their paper the authors did not provide a complete solution to this complex problem. We provide the solution in this paper.
In this paper, our objectives are to characterize the sources of inertia, to study the events that trigger switching in the presence of inertia, and to simulate and compare the eﬀects of interventions aimed at reducing inertia. We specify a model of consumer choice with two crucial features. First, the model comprises separate attention and plan-selection stages, to separate inattention to plan choice from switchingcosts as reasons for inertia. These stages are distinct and econometrically identified by fundamental exclusion restrictions: Attention is triggered by events that have occurred before the current enrollment period; e.g., discontinuation of previous plan, incidence of a new health condition, or a shock from an announced change in current plan premium or formulary. Plan choices are driven by future costs and expected benefits, information that is not acquired by the inattentive consumer. Then, past attention triggers should be irrelevant to and excluded from plan choice made by attentive consumers, while future features and costs of plans other than a previous plan, which the consumer can learn only by paying attention, are logically excluded from the attention stage. As Abaluck and Gruber (2016a) note, the distinction between attention and plan choice stages has important normative implications for the design of defaults and other policies that encourage thoughtful health decisions. Second, our choice model allows for unobserved heterogeneity in the ability and willingness to make diligent choices. In the following, we call this latent factor “acuity”. It aﬀects all on decision-making skills is a better explanation than cumulative market experience for subsequent outcomes achieved by plan switchers.
We also estimated two additional model specifications, which we have not reported in the paper due to space constraints. 20 In the first specification, we interacted technology dummies and switchingcosts with a dummy variable indicating the presence of a cable operator in a municipality. We found that the presence of cable broadband reduces the valuation of both DSL and FttH technologies. This may be due to a higher valuation of the outside option in these geographic areas since consumers living there can get better deals in terms of connection speed and other services when they leave our operator. In addition, we find that costs for switching to FttH significantly decrease in these areas, which may be due to intense marketing campaigns. Our operator intensively promoted FttH to DSL consumers to preempt them from leaving to a cable operator. These marketing campaigns make consumers better informed about the availability and benefits which fiber brings in terms of higher speed. The other model estimates remain unchanged.
Baron (2002a) argues that customers don’t switch often between firms, due to the existence of switchingcosts. Von Weizsacker (1984) and Klemperer (1987a) introduced the term "switchingcosts" into the economic literature (see also Klemperer, 1987b, 1995, Padilla, 1995, To, 1996). They assume that a customer incurs costs in switching from one firm to another, like ‘learning costs’, ‘transaction costs’, ‘psychological costs’. The consumer adopts one of the firms in the first period, when commodities are offered at different prices. In the second period, if the consumers want to switch firms they incur switchingcosts. The result is that customers are likely to be loyal to the firm from which they purchased in the first period. Two cases are analyzed: "endogenous switchingcosts" and "exogenous switchingcosts". Endogenous switchingcosts exist when firms encourage customers to become loyal by plans like ‘frequent flier’. Customers are offered the commodity at a lower price in the second period, if they remain loyal to the firm. The firm bears the costs, the foregone revenues.
The model only considers switching between banks due to price differences and switchingcosts—implicitly, it is assumed there are no differences in perceived bank risk to incentivize switching due to such risk. Thus, the model presented here is closer to the conclusion of Demirgüc¸-Kunt and Detragiache (2002) that increased deposit insurance implies reduced monitoring from depositors than to the results of Martinez Peria and Schmukler (2001) for Latin America. The dataset used in the latter paper includes periods during which there were severe banking crises, whereas the assumption of no effect of bank risk in customer switching used here for a period during which there were no severe bank crises seems appropriate. Furthermore, the relationship between deposit insurance and customer discipline is mediated by several other variables, as noted by Laeven and Levine (2009) .
within the provincial and rural area. Therefore the backgrounds for different categories of banks are not same. These differences are captured by dummy variables. Similarly it is argued that big bank have less motivation to lock-in their client, therefore bank size dummy variables are included to test whether the banks with different sizes have different switchingcosts. We include control dummy variables for regions and foreign ownership. RD is a regional dummy where the HQ is in the east part of China = 1, otherwise 0. FD measures foreign banks as 1, and domestic banks as 0. Foreign banks are newcomers to banking market in China. Compared with local banks, foreign banks are lack of network relationship. Domestic banks include large commercial banks, joint-stock commercial banks, city and rural commercial banks. Large commercial banks are the biggest banks in China, established earliest and now taking largest share of the banking market. Joint-stock commercial banks, city and rural commercial banks are usually considered as having higher efficiency and better services than large commercial banks.
4.1 Calibration Procedure
Using the model of Section 2, and the deposit market shares and service fees calculated in Section 3, I can attempt to measure the switchingcosts. A chal- lenge in this exercise is that I do not know the distribution of customers across various levels of the banks’ customer loyalty programs. Thus, while Table 3 sug- gests that three main banks with the largest market shares engage in product differentiation, there is no point to extend the single fee model of Section 2 to capture this phenomenon. I thus proceed as if the all banks would set a single fee as in the model of Section 2.
of market stage two.
Prices of p ∈ [59, 60] are frequently chosen by monopolists who price according to the static Nash-prediction (Figure 5). Precisely, 47.5% of all monopolists, price in this inter- val and even 80.2% choose a price of p ≤ 60. Given a rival’s rationality, the majority of monopolists therefore effectively harvest their locked-in customers while not loosing demand over to its rival. If switchingcosts are absent however, only 18.3% of prior mo- nopolist choose a price of p ∈ [40, 41] which would correspond to static equilibrium play. We find these distributional differences to be significant (KS, all p < 0.1). Additionally, the condensing of probability mass is also reflected in lower variances in all supergames (Fligner-Killeen, all p < 0.05). This however has implications for cartel screening in an- titrust policy. Screens often take small variances as signal for potential cartel activities (Abrantes-Metz et al., 2006). Switchingcosts could then lead to an increased number of false positives whereas firms are acting in fact competitive.
1 1. Introduction
Since the 1990´s a spectrum of influential studies, comprising theoretical, policy-oriented as well as empirical ones, has focused on the fundamental question of whether there is a tradeoff between competition and stability in banking (see Carletti and Hartmann (2003) for a literature survey and Allen and Gale (2004) for a synthesis of various theories). In this study we will re-address this issue by applying a two-period switching cost model designed to characterize the effects of intensified competition in the deposit market on the probability of bank failures. Such a switching cost approach to assess the relationship between competition and financial stability in banking is justified in light of convincing empirical evidence according to which switchingcosts are a significant source of market power in banking (for example, Shy (2002), Stango (2002), and Kim et al (2003)).
for new consumer groups compared to a scenario of no switchingcosts. Once consumers are locked-in, firms are able to exploit their market power and set prices which are above the level of the no-switchingcosts regime.
Given switchingcosts in consumer demand, the effect on supply-side profits is evaluated. To this extent an equilibrium model of demand and supply is developed. The demand model explicitly disentangles structural state dependence from unobserved household be- havior. The supply model accounts for the strategic behavior of retailers and manufac- turers in a differentiated goods set-up with multi-product firms. As the net price effect of investing in market shares and exploiting consumer inertia is not clear, I impose a coun- terfactual analysis to analyze market competitiveness with and without switchingcosts. Results show that there is a significant degree of structural state dependence in the form of brand loyalty or consumer inertia, even after controlling for household heterogeneity. The magnitude of switchingcosts is quantified by comparing changes in consumer welfare for two different market scenarios: demand with and demand without switchingcosts. I find that the average consumer has to be compensated with roughly 60% of the retail price if switchingcosts are removed, which gives a willingness-to-pay measure for switch- ing costs. Furthermore, I find that the dynamic model better explains observed pricing patterns. Finally, the counterfactual supply-side analysis yields that firms are worse off with than without switchingcosts. Firms engage in price wars in order to attract new consumer groups and increase market shares, which cannot be compensated by the profit gains from the locked-in consumer groups.
If consumers all had the same switching cost, they could make their pur- chasing decisions without taking into account the choices of other consumers. On the other hand, when switchingcosts differ, a firm’s future price will depend on the type of consumers to which it sold to in the past. Therefore, rational consumers take into account which consumers they expect to pur- chase from each firm when making their purchasing decision. This creates an externality across consumer types; as we will see, at equal prices, high switching cost consumers would prefer to purchase from a firm whose client` ele is mostly composed of low switching cost consumers.
Social Networking Sites (SNS), SwitchingCosts, Layers, Network Effects, Market Power
Social Networking Sites (SNS) are one of the fastest growing applications on the Internet. Each of these single applications also functions as a communication platform, where users can communicate with one another, voice opinions, collect information, and use built-in applications such as games or schedulers. Recently in Japan, although global SNS such as Facebook, Google+, or Twitter are beginning to diffuse, local SNS such as mixi or Ameba continue to include a large number of active users. This indicates that there exist switchingcosts when changing SNS. Switchingcosts are defined as the various economic and psychological costs incurred when a customer changes service suppliers. Farrell and Klemperer (2007) reviewed previous studies regarding switchingcosts and covered both theoretical and empirical approaches. Although some authors provide counterexamples, in which switchingcosts can in fact reduce prices, most studies indicate that sufficiently high switchingcosts create market power. Many studies also have examined the role of switchingcosts in the telecommunications sector (Madden et al., 1999, Lee et al., 2006, Ida and Kuroda, 2009, Nakamura, 2010, Nakamura, 2011, etc.).
free-form communication is an effective coordination device in dilemma games. However, communication among firms also negates competitive effects induced by switchingcosts as they neither affect the level nor the distribution of prices if firms are in fact communicating. Third, switchingcosts induce distributional effects. Firms’ prices towards consumers who have not bought yet are more con- centrated at marginal cost level. Further, the price distribution of firms who serve all consumers in the first market stage exhibits a lower variance in the second market stage. Those firms harvest their customer base through prices in close proximity to the static Nash-equilibrium. The fourth result is that switchingcosts dampen the scope for tacit collusion as firms’ supra-competitive profits are sig- nificantly reduced. On the other hand the profit gains from communication are more pronounced making explicit conspiracies more attractive. Additionally, the application of text-mining procedures suggests that the amount of noncommittal language used in subjects’ communication limits the effectiveness of the commu- nicated content.
In his survey of Chilean Banks Valenzuela (2014) grouped switching barriers into five categories or factors. Three of these factors could be associated with positive or more reward- based switching barriers (organizational credibility, value congruency and relational value) with the other two factors associated with negative or punitive switching barriers (difficulties of switching and lack of attractive alternatives) (Valenzuela, 2014). Different papers proved that the switchingcosts have direct influence on consumer loyalty (Venezuela, 2014) and also the indirect or moderating influence (Lam et al. 2004; Yang and Peterson, 2004; Wang, 2010; Stan, Caemmerer and Cattan-Jallet, 2013). In this study, the both roles of the switching cost will be examined. Consequently, these hypothesis are suggested as follows: