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Welfare Effects of Switching Barriers Through Permanence Clauses: Evidence from the Mobiles Market in Colombia

Alvaro Riascos (), Juan David Martín () and Natalia Serna ()

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Abstract: During 2014, the Comisión de Regulación de Comunicaciones in Colombia enacted a Resolution by which permanence clauses or fixed-length terms in mobile telecommunications contracts were prohibited for network operators offering bundled mobile terminals and voice plans. Prohibition was enacted under the argument permanence clauses create switching costs, reduce competition, and generate information asymmetries. In this study we measure the impact of the Resolution on consumer, firm, and social welfare by estimating the structural demand for mobile terminals and conducting two counterfactual scenarios. We show switching costs by means of permanence clauses reduce consumer utility and increase the variance of the utility distribution. We also show the Colombian market for mobile terminals has been better off without permanence clauses, with both consumers and firms experiencing gains from the prohibition. However, variation in firm surplus is explained mostly by the variation in profits of incumbent network operators than by the variation in profits of firms selling terminals at cash price. Our study contributes to the literature of bundled sales and switching costs and is crucial from the perspective of regulation and industrial policy in the telecommunications sector.

Keywords: switching costs; permanence clauses; structural demand; telecommunications; fixed-length contracts (search for similar items in EconPapers)
JEL-codes: L50 L13 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-lam, nep-pay and nep-upt
Date: 2017-07-03
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Journal Article: Welfare effects of switching barriers through permanence clauses: Evidence from the mobiles market in Colombia (2019) Downloads
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