Welfare analysis of equilibria with and without early termination fees in the US wireless industry

Arbeitspapier

We study the social welfare implications of early termination fees in the US wireless industry. It is hypothesized that the elimination of long-term contracts at the end of 2015 was a transition from one market equilibrium to another. We use a theoretical model to illustrate that the endogenous choice of consumer switching costs by service providers does not necessarily raise firms' profits or hurt consumers. The forward-looking behavior of consumers facing switching costs results in significant downward pressure on prices. Service fees may be so low that consumers are better off and firms are worse off in an equilibrium with switching costs. Empirically, we find that without early termination fees, firms would increase prices by 2 to 5 percent, on average, resulting in an unambiguous increase in consumer surplus. Firms' profits derived from monthly service fees also increase. However, if we consider additional revenues from contract termination payments, the cost of processing these payments should be large enough for producer profits to be higher in the new equilibrium.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2020-9

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Empirical Analysis ; Information and Product Quality; Standardization and Compatibility ; Telecommunications
• Subject: Econometric and statistical methods ; Firm dynamics ; Market structure and pricing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cullen, Joseph ; Schutz, Nicolas ; Shcherbakov, Oleksandr
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2020

Further information

• DOI: doi:10.34989/swp-2020-9
• Handle: http://hdl.handle.net/10419/241175
• Last update: 10.03.2025, 11:44 AM CET