Consumers and Wireless Carterfone: An Economic Perspective

Abstract

In this paper, we consider the argument that Carterfone-type rules are required in response to mobile operators' use of term contracts, early termination fees, and allegedly restrictive handset certification and support policies. First, we show that such practices by mobile operators are entirely consistent with competitive rivalry, so their use is not an indicator of market power as is frequently claimed. Second, we show that these practices drive down prices for equipment by increasing the degree of complementarity between the mobile device and mobile services. Consequently, applying wireless Carterfone regulations would result in higher equipment prices for consumers, with little if any compensating reduction in service prices. As such, wireless Carterfone regulations cause a wealth transfer from consumers to producers. From a pricing perspective, our welfare calculations imply that wireless Carterfone is bad for consumers and society and, therefore, such losses must be compared to any demonstrated gains from the proposed regulation.

Keywords: Wireless, wireless Carterfone, early termination fees, complementarity

JEL Classification: K23, L13, L14, L51, L96, L98, O33, O38