A Steady State Approach to a Network Externality Market with Switching Costs

26 Pages Posted: 20 Oct 2010

See all articles by David A. Miller

David A. Miller

University of California, San Diego - Department of Economics

Xiahua Wei

University of Washington, Bothell School of Business

Timothy R. Keller

University of California, San Diego (UCSD)

Date Written: September 30, 2010

Abstract

We study duopoly pricing in the market for mobile phone service, which features network externalities, switching costs, and consumer heterogeneity. We introduce a steady state approach that enables a tractable analysis without endgame effects. The model can generate a variety of testable predictions, of which we focus on the comparative statics with respect to switching costs. Using data on the mobile phone service industries in 52 countries, we use the variation in market structure at the time switching costs were suddenly reduced by the regulatory imposition of mobile number portability (MNP). Firms that grew more rapidly prior to MNP respond to MNP by pricing more aggressively; firms facing large competitors respond less aggressively. Exploration of the model and its implications is an object of ongoing research.

Keywords: Oligopoly, Network Externalities, Switching Costs, Mobile Number Portability

JEL Classification: L13

Suggested Citation

Miller, David A. and Wei, Xiahua and Keller, Timothy R., A Steady State Approach to a Network Externality Market with Switching Costs (September 30, 2010). NET Institute Working Paper No. 10-19, Available at SSRN: https://ssrn.com/abstract=1694393 or http://dx.doi.org/10.2139/ssrn.1694393

David A. Miller (Contact Author)

University of California, San Diego - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-822-0632 (Phone)

HOME PAGE: http://weber.ucsd.edu/~d9miller

Xiahua Wei

University of Washington, Bothell School of Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Timothy R. Keller

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

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