The Effect of Switching Costs on Prices: An Application to the Peruvian Mobile Phone Market

Tilsa Ore Monago
2017 Social Science Research Network  
Based on a game theoretical model I previously developed, I present some evidence of the effect of the unlocked-handset policy recently implemented in Peru based on market analysis and reduced form empirical methods using consumer panel data. Average prices declined since mid 2014, and the switching rate rocketed since the implementation of the policy in January 2015. To retain consumers and attract rival's consumers, companies responded also with very low on-net prices through their "private
more » ... twork" with unlimited minutes, which may have increased the network effects in the market. From my estimation, I found a significant negative effect of switching costs on demand for voice traffic (which suggest a positive effect of the unlocked-handset policy on demand) and positive network effects on the demand. The policy, by reducing consumer switching costs, would have generated an increase of 39.7% in the minutes consumed by switchers. Moreover, any change of consumer status (company or consumption plan) is associated with 31.2% increase in minutes consumed. I also found that, with lower significance level, the policy would have induced a reduction of per-minute prices by 9.6%. * This research paper is part of my on-going doctoral dissertation. I would like to thank Claudia Barriga, Jose Carlos Aguilar and Jorge Trelles from OSIPTEL, to Gonzalo Ruiz (former President of OSIPTEL), Manuel Cipriano, and Javier Alvarez (from IPSOS Peru) for their valuable cooperation; also I thank Wilmer Cordoba and Carlos Ireijo for their insights about the market. My deepest gratitude to the NET Institute, www.netinst.org, for funding this research project. All the errors are my own. My
doi:10.2139/ssrn.3049369 fatcat:6qgzicykazhk5pat7rouhxhqda