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A Steady State Approach to a Network Externality Market With Switching Costs

Authors: Keller, Timothy - UC San Diego
Miller, David A. - UC San Diego
Wei, Xiahua (Anny) - UC San Diego
Keywords: Oligopoly, network externalities, switching costs, mobile number portability
Issue Date: 2010
Series/Report no.: Net Institute Working Paper;10-19
Abstract: We study duopoly pricing in the market for mobile phone service, which features network externalities, switching costs, and consumer heterogeneity. We introduce a steady state approach that enables a tractable analysis without endgame effects. The model can generate a variety of testable predictions, of which we focus on the comparative statics with respect to switching costs. Using data on the mobile phone service industries in 52 countries, we use the variation in market structure at the time switching costs were suddenly reduced by the regulatory imposition of mobile number portability (MNP). Firms that grew more rapidly prior to MNP respond to MNP by pricing more aggressively; firms facing large competitors respond less aggressively. Exploration of the model and its implications is an object of ongoing research.
Appears in Collections:NET Institute Working Papers Series

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