Network Effects and Switching Costs in the US Wireless Industry


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 US-$ 47 to US-$ 178. The willingness to pay for a 15%-point increase in a carrier’s market share is on average US-$ 8.50 per month. Finally, I show that ignoring either one of the effects results in substantial errors when simulating counterfactuals.

International Economic Review 63 (2), 601-630