The Library

The impact of "rollover" contracts on switching costs in the UK voice market : evidence from disaggregate customer billing data

Tools

Crawford, Gregory S., Tosini, Nicola and Waehrer, Keith (2011) The impact of "rollover" contracts on switching costs in the UK voice market : evidence from disaggregate customer billing data. Working Paper. Coventry: Department of Economics, University of Warwick. Warwick economics research paper series (TWERPS) (Number 980). (Unpublished)

[img]
Preview
 Text (Working paper)
WRAP_Crawford_twerp_980.pdf - Other
Download (366Kb) | Preview

Abstract

In February 2008, British Telecommunications (BT) introduced automatically renewing, or “rollover”, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts in media and telecommunications markets.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): BT Group, Telecommunication -- Great Britain, Economics, Telephone -- Rates -- Great Britain, Telecommunication policy -- Great Britain
Series Name: Warwick economics research paper series (TWERPS)
Publisher: Department of Economics, University of Warwick
Place of Publication: Coventry
Official Date: 2 July 2011
Dates:
DateEvent
2 July 2011["eprint_fieldopt_dates_date_type_available" not defined]
Number: Number 980
Number of Pages: 38
Status: Not Peer Reviewed
Publication Status: Unpublished
References:

Aghion, P. and P. Bolton, 1987, “Contracts as a Barrier to Entry,” American Economic Review, 77, 388–401
BT, 2010, “Annex 10 to Ofcom’s consultation document,” available at http://stakeholders.ofcom.org.uk/consultations/arcs
BT, 2011, “BT’s response to Ofcom’s consultation document,” available at http://www.btplc.com/Thegroup/RegulatoryandPublicaffairs/Consultativeresponses/Ofcom/201
1/AutomaticRenewableContract/ARCs_condoc_response_-_non_confidential_version.pdf
Cameron, C. and P. Trivedi, 2005, Microeconometrics: Methods and Applications, New York: Cambridge University Press
Crawford, G. and M. Shum, 2005, “Uncertainty and Learning in Pharmaceutical Demand,” Econometrica, 73, 1137–1174
Della Vigna, S, 2009, “Psychology and Economics: Evidence from the Field,” Journal of Economic Perspectives, 47, 315-372
Dubé, J.P., G. Hitsch, and P. Rossi, 2009, “Do Switching Costs Make Markets More Competitive,” Journal of Marketing Research, 46, 435–445
Dubé, J.P., G. Hitsch, P. Rossi, M. A. Vitorino, 2008, “Category Pricing with State-Dependent Utility,” Marketing Science, 27, 417-429
Farrell, J. and P. Klemperer, 2007, “Coordination and Lock-In: Competition with Switching Costs and Network Effects,” in M. Armstrong and R. Porter, eds., Handbook of Industrial Organization, Vol. 3, Ch. 31, Amsterdam: North-Holland
Goettler, R., and K. Clay, forthcoming 2011, "Tariff Choice with Consumer Learning and Switching Costs,” Journal of Marketing Research
Greene, W., 2000, Econometric Analysis, Upper Saddle River, NJ: Prentice-Hall
Handel, B., 2010, “Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts,” manuscript, University of California at Berkeley, available at http://www.econ.berkeley.edu/~bhandel/wp/switchingcosts.pdf
Jenkins, S., 2004, Survival Analysis, Unpublished manuscript, Institute for Social and Economic
Research, University of Essex, Colchester, UK. Available at
http://www.iser.essex.ac.uk/teaching/degree/stephenj/ec968/pdfs/ec968lnotesv6.pdf.
Klemperer, P., 1987, “Markets with Switching Costs,” Quarterly Journal of Economics, 102, 375- 394

Klemperer, P., 1995, “Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and international Trade,” Review of Economic Studies, 515–539
Maddala, G., 1983, Limited-Dependent and Qualitative Variables in Econometrics, New York: Cambridge University Press
Ofcom, 2009a, “Fixed Narrowband Retail Services Markets: Statement,” available at www.ofcom.org.uk
Ofcom, 2009b, “The Communications Market 2008,” available at www.ofcom.org.uk
Rasmusen, E., M. Ramseyer and J. Wiley, 1991, “Naked Exclusion,” American Economic Review, 81, 1137-1145
Segal, I. and M. Whinston, 2000, “Naked Exclusion: Comment,” American Economic Review, 90, 296-309
Shcherbakov, A., 2007, “Measuring Consumer Switching Costs in the Television Industry,” mimeo, University of Arizona
Sunstein, C., and R. Thaler, 2008, Nudge, New Haven, CT: Yale University Press
Viard, B., 2007, “Do Switching Costs Make Markets More or Less Competitive? The Case of 800- Number Portability,” Rand Journal of Economics, 38, 146–163
Which? Magazine, 2010, “Hanging on the telephone?” March Issue, 22-24 Whinston, M., 2006, Lectures on Antitrust Economics, Cambridge, MA: MIT Press
Wooldridge, J., 2002, Econometric Analysis of Cross Section and Panel Data, Cambridge: MIT Press
URI: http://wrap.warwick.ac.uk/id/eprint/44429

Request changes or add full text files to a record

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics