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

Shi, Mengze; Chiang, Jeongwen; Rhee, Byong-Duk

doi:10.1287/mnsc.1050.0466

Cited by 77 publications

(89 citation statements)

References 16 publications

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“…Consistent with this view, switching costs have been shown to raise prices for commercial (Viard, 2007) and consumer (Shi, Chiang and Rhee, 2006;Park, 2011) telecommunications services as well as credit cards (Stango, 2002). In some cases, the effects are estimated to be substantial.…”

Section: Inertiamentioning

confidence: 87%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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Section: Inertiamentioning

confidence: 87%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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“…There are many examples. In information systems: Viswanathan (2005) and Demirhan et al (2007), in marketing: Shi et al (2006), and in operations management: Kamrad and Siddique (2004) and Gans (2002). We thoroughly examine the impact of switching costs when competitive upgrade discount pricing is used and show that competing firms have the incentive to design their products in a way so that the switching costs are reduced.…”

Section: Related Literaturementioning

confidence: 99%

Competitive Behavior-Based Price Discrimination for Software Upgrades

Mehra

Bala

Sankaranarayanan

2012

Information Systems Research

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T he introduction of product upgrades in a competitive environment is commonly observed in the software industry. When introducing a new product, a software vendor may employ behavior-based price discrimination (BBPD) by offering a discount over its market price to entice existing customers of the competitor. This type of pricing is referred to as competitive upgrade discount pricing and is possible because the vendor can use proof of purchase of a competitor's product as credible evidence to offer the discount. At the same time, the competitor may offer a discount to its own previous customers in order to induce them to buy its upgrade. We formulate a game-theoretic model involving an incumbent and entrant where both firms can offer discounts to existing customers of the incumbent. Although several equilibrium possibilities exist, we establish that an equilibrium with competitive upgrade discount pricing is observed only for a unique market structure and a corresponding unique set of prices. In this equilibrium, instead of leveraging its first mover advantage, the incumbent cedes market share to the entrant. Furthermore, the profits of both the incumbent and the entrant reduce with switching costs. This implies that the use of BBPD has product design implications because firms may influence the switching costs between their products by making appropriate compatibility decisions. In addition, lower switching costs result in reduced consumer surplus. Hence, a social planner may want to increase switching costs. The resulting policy implications are different from those prevalent in other industries such as mobile telecommunications where the regulators reduced switching costs by enforcing number portability.

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“…There has been a growing number of empirical studies on switching costs in various technology markets including mainframes [52], online brokerage services [30], mobile phone services [89], routers and switches [29], and interorganizational systems [107]. Three important findings emerge from these empirical studies.…”

Section: Switching Costsmentioning

confidence: 99%

Influences on standards adoption in de facto standardization

Techatassanasoontorn

Suo

2011

Inf Technol Manag

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In the IT industry, de facto standards emerge from standards competition as firms offer incompatible technologies, and user choices determine the outcome of the competition. The standards literature suggests that strong network effects create a bias toward a standard with a large installed base, leading to a winner-take-all outcome. More recently, several researchers have revealed that the dynamics of standardization are much more complex than the explanation offered by the economic theory of networks. Markets do not always exhibit tipping behavior so there is not always a single winner in de facto standardization; and the size of an overall installed base does not always exert a strong influence on adoption decisions. In contrast, network effects drawn from local social influence may be more salient to user adoption decisions. We ask: (1) Do we always observe a winner-take-all outcome in de facto standards competition? (2) What are the different technology adoption patterns observed in de facto standards competition? (3) What are the implications of network effects, switching costs, pricing, and functionality enhancement strategies on the outcome of de facto standards competition in different user network structures? Drawing on the economic theory of networks, the complex network theory, and previous work in the standards literature, we examine the influence of network effects, switching costs, price, and technology functionality on user adoption decisions using agent-based simulation. We incorporate underlying user network structures frequently observed in the real world as an important determining factor of user adoption decisions. Our results suggest that de facto standardization process does not always follow a three-phased S-shaped pattern. Winner-take-all is not a necessary outcome of standards competition. User network structures have a significant impact on the dynamics and outcomes of standards competition.

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

Cited by 77 publications

References 16 publications

Failing to Choose the Best Price: Theory, Evidence, and Policy

Failing to Choose the Best Price: Theory, Evidence, and Policy

Competitive Behavior-Based Price Discrimination for Software Upgrades

Influences on standards adoption in de facto standardization

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