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

In this paper we study how a reduction of consumer switching costs may affect market competition in the wireless telecommunication industry. The reduction of switching costs can be achieved through the implementation of a regulatory policy called Wireless Number Portability (WNP) that allows consumers to retain the same phone numbers when they switch service providers. By r educing consumers' switching costs, WNP was intended to intensify price competition and facilitate the growth of new service providers. However, our analysis shows that, when networks incur interconnection costs, a reduction of switching costs may accelerate the process of market concentration. With positive interconnection costs, the networks charge lower usage fees for the calls within the same networks than for calls between the networks. Such network-based price discounts provide the large network with a competitive advantage because its subscribers are more likely to enjoy price discounts than the subscribers to a small network. Consequently, subscription to the large network can become more attractive even though the large network charges higher fees to exploit the consumers' switching costs. We relate our analytical results to the empirical evidence from the Hong Kong market where WNP was adopted in March of 1999.