Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry

Nicoletta Corrocher and Lorenzo Zirulia

No 166, KITeS Working Papers from KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy

Abstract: In this paper we develop a formal model that captures some basic features of competition in the mobile communications service industry. In a model of oligopolistic competition with price discrimination and switching costs, we study the role of firms’ installed base of consumers in providing the incentives to offer contracts for a new class of consumers with a lower willingness to pay. The model predicts that there exists an inverse relationship between the share of the leader in the market of consumers with high willingness to pay and its share in the market of consumers with low willingness to pay. This implies that market shares converge. If firms collude in the introduction of new contracts, convergence is milder. This result is consistent with the empirical evidence related to the mobile communications industry in different European countries, where we observe a convergence in market shares driven by the superior ability of followers to acquire new customers, who typically have lower willingness to pay as compared with early adopters.

Keywords: Switching costs; Price discrimination; Mobile communications (search for similar items in EconPapers)
JEL-codes: L13 L96 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2005-05, Revised 2005-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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