STANFORD, Calif., Nov. 13 (AScribe Newswire) -- On November 24, the Federal Communications Commission is expected to implement measures to ensure portability of cellular phone numbers. This move is sure to be greeted with enthusiasm by consumers who, when faced with switching cellular phone carriers, have had to contend with notifying everyone in their phone book, or changing their stationery, or putting a forwarding message on their old number that will expire within a scant few months. Yet, could lowering switching costs lead to higher prices for consumers? A new study released by the Stanford Graduate School of Business says, contrary to past research, that the answer could be "yes" under some conditions. However, the study goes on to provide strong evidence that the portability move is, as anticipated, good news for cell phone users.
Switching costs are aggressively exploited by companies in areas such as computers, banking, telephony, and more. The game is to lure you in with attractive introductory offers and then zap you with higher rates, new fees, and fewer perks once you are so "locked in" that switching to a new firm would be a real pain in the neck--or the wallet.
While it's clear that companies that can distinguish between new and old customers will always price their products and services higher for the "locked-in" crowd, it hasn't been as clear whether a firm that can't tell who's who in its customer base--or one that has been prohibited by regulation from engaging in price discrimination--will price higher or lower across the board. Brian Viard, assistant professor of strategic management at the Stanford Graduate School of Business, studied the issue theoretically and empirically and found evidence to support the idea that lower switching costs actually do translate into lower prices for consumers.
Viard's theoretical analysis reveals that pricing by discrimination prohibited firms whose customers incur switching costs can go either way, higher or lower, depending on the nature of the market. "If there are enough new customers coming into the market, firms will compete to grab them and will therefore price their products or services lower overall," Viard explains. "If, however, there aren't enough new customers in the market, then firms focus on exploiting the customers they already have who are 'locked in' and price higher."
Earlier research in the field concluded that switching costs always lead to higher prices. Viard disagrees, arguing that earlier work assumed that firms did not put value on long-term relationships with customers. "Such models would only be appropriate for companies that were, say, going bankrupt shortly and didn't really care about the ongoing value of new customers. My model considers a longer time horizon and is applicable for companies that are going to be around for a while," he says.
Previous research also did not explore whether prices are higher or lower in markets in which firms cannot price discriminate. Viard's study begins to fill in that gap by looking at 800-number pricing before and after such numbers became portable. "In May 1993, regulations permitted customers to take their numbers with them even if they switched telephone service providers," Viard explains. "That significantly reduced switching costs for these customers, which were considerable in the case of companies that relied heavily on 800 numbers, such as American Airlines."
By studying several hundred AT&T telephone contracts for big 800-number users, Viard found that after portability, the cost of 800 numbers fell. "This means that when switching costs were high, prices were higher. Lower switching costs led to lower prices," Viard says. "This is the intuitive answer, but theoretically it could have gone the other way. Again, if switching costs ever led to lower prices, it would be in a high-growth market where there were lots of new customers. The fact that the 800-number market was growing quickly during this period means that this finding is very conservative and that we can pretty much expect lower switching costs to lead to more competitive markets across the board."
The significance of such research, Viard says, lies in
its public policy implications. "If switching costs do lead
to higher prices, regulators will want to institute rules to
reduce such costs for the consumer." In fact, he notes, such
a decision has recently come up in the cellular telephone
industry. "The FCC has ruled that cellular companies must
institute cell number portability by November," he
says. "Number portability will lower consumers' switching
costs, which my work suggests will lead to lower prices. If
the costs of portability implementation are not too great
and you care about consumers, you should be in favor of it."
|
|
|
AScribe Newswire distributes news from nonprofit and public sector organizations. We provide direct, immediate access to mainstream national media for 600 colleges, universities, medical centers, public-policy groups and other leading nonprofit organizations.
AScribe transmits news releases directly to newsroom computer systems and desktops of major media organizations via a supremely trusted channel - The Associated Press. We also feed news to major news retrieval database services, online publications and to developers of web sites and Intranets.
And AScribe does it at a cost all organizations, large and small, can afford, a fraction of what corporate newswires charge. Click here to see how we do it