Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone

Abstract

Since the Apple iPhone’s first launch in 2007 with an exclusive arrangement with AT&T, it has garnered overwhelmingly positive responses from consumers and from the media. With its success, exclusive contracts between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. Such practices have been criticized by regulators, by the media, and by “locked-out” consumers, due to the fact that a consumer has to subscribe to a particular service provider if he or she strongly prefers one handset to others. In this paper, we empirically examine the impact of handset exclusivity arrangements on consumer welfare. First we study consumers’ purchase decisions in mobile services that include the choice of a handset and of a service provider. We do so by combining survey data on consumers’ purchase decisions with supplemented data on prices and features of common handsets. Next, assuming a Stackelberg leader-follower relationship between the handset manufacturers and the service providers, and using our demand estimates, we recover the marginal costs for the players in the market. We then simulate what would have happened in the counterfactual scenario when the iPhone is available from all carriers. Our results suggest that, if we take into account price adjustments from handset manufacturers and service providers in response to the change in market structure, consumer welfare will increase by $326 million without the exclusive arrangement. We view our analysis as a starting point to a more complete characterization of consumer behavior and the complex relationships among players in this industry.