Network Effects and Switching Costs in the US Wireless Industry

Abstract

I estimate a model of dynamic consumer behavior to disentangle switching costs and network effects in the US wireless industry. A detailed panel on market shares and churn rates, disaggregated by demographic consumer types and local markets, allows me to separately identify preference heterogeneity, switching costs, and a localized direct network effect. My switching cost estimates range from USD 32 to USD 140. The willingness to pay for a 15%-point increase in a carrier’s market share is on average USD 7 per month. Finally, I show that ignoring either one of the effects results in substantial errors when simulating counterfactuals.

Status
revise and resubmit IER