The Impact of 'Rollover' Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data

41 Pages Posted: 22 Dec 2011

See all articles by Gregory S. Crawford

Gregory S. Crawford

University of Zurich - Department of Economics

Nicola Tosini

NERA Economic Consulting

Keith Waehrer

Bates White Economic Consulting

Date Written: December 2011

Abstract

In February 2008, British Telecommunications (BT) introduced automatically renewing, or ‘rollover’, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts in media and telecommunications markets.

Keywords: bundling, contracts, rollover, switching costs, telecommunications, telephone

JEL Classification: C33, C34, L43, L96

Suggested Citation

Crawford, Gregory S. and Tosini, Nicola and Waehrer, Keith, The Impact of 'Rollover' Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data (December 2011). CEPR Discussion Paper No. DP8693. Available at SSRN: https://ssrn.com/abstract=1976035

Gregory S. Crawford (Contact Author)

University of Zurich - Department of Economics ( email )

Schönberggasse 1
Zürich, CH-8001
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/groupcrawford.html

Nicola Tosini

NERA Economic Consulting ( email )

Unter den Linden 14
Berlin, 10117
Germany
30700150670 (Phone)

HOME PAGE: http://www.nera.com/experts/nicola-tosini.html

Keith Waehrer

Bates White Economic Consulting ( email )

2001 K Street, NW
North Building, Suite 500
Washington, DC 20006
United States

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