Welfare analysis of equilibria with and without early termination fees in the US wireless industry / by Joseph Cullen, Nicolas Schutz and Oleksandr Shcherbakov.: FB3-5/2020-9E-PDF

"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"--Abstract, page ii.

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Publication information
Department/Agency Bank of Canada.
Title Welfare analysis of equilibria with and without early termination fees in the US wireless industry / by Joseph Cullen, Nicolas Schutz and Oleksandr Shcherbakov.
Series title Staff working paper = Document de travail du personnel, 1701-9397 ; 2020-9
Publication type Series - View Master Record
Language [English]
Format Electronic
Electronic document
Note(s) "Last updated: March 23, 2020."
Includes bibliographical references (pages 34-35).
Publishing information Ottawa, Ontario, Canada : Bank of Canada = Banque du Canada, 2020.
©2020
Author / Contributor Cullen, Joseph (Joseph A.)author.
Description 1 online resource (ii, 47 pages) : illustrations.
Catalogue number
  • FB3-5/2020-9E-PDF
Subject terms Cell phone services industry -- Rates -- United States -- Econometric models.
Téléphone cellulaire -- Industrie -- Tarifs -- États-Unis -- Modèles économétriques.
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