Price Discrimination Amid Heterogeneous Switching Costs: A Competitive Strategy of the Long Distance Telephony Fringe

Abstract

This paper explores competition in the post 1996 long distance telephony market by employing an unusually detailed original data set. New evidence of third degree price discrimination is found with rural, low income, and Native American customer groups facing higher prices. Results indicate that individuals who are less willing to switch carriers frequently pay significantly higher prices. A multi-dimensional mixture model is used to characterize switching behavior and finds significant heterogeneity in subscriber switching costs. The model provides insight into price differential ranges supporting resale firm survival. These findings can be useful for determining optimal firm response as well as optimal telecommunications market policy.