Discussion Paper Details

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Title: The Welfare Effects of Early Termination Fees in the US Wireless Industry

Author(s): Joseph Cullen, Nicolas Schutz and Oleksandr Shcherbakov

Publication Date: November 2020

Keyword(s): dynamics, perfect foresight, structural estimation and Switching Costs

Programme Area(s): Industrial Organization

Abstract: We develop and estimate a dynamic structural model of the US wireless industry. The demand model features two sources of dynamics: First, consumers that switch contracts must pay early termination fees to their current wireless service provider; second, handsets are durable. Consumers and wireless carriers are forward-looking and, in contrast to previous work, have perfect foresight over the evolution of the industry. Carriers compete using open-loop strategies. Counterfactual simulations reveal that the elimination of early termination fees, despite raising equilibrium prices, unambiguously benefits consumers. Firms may benefit as well provided the cost of processing early termination fees is high enough.

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Bibliographic Reference

Cullen, J, Schutz, N and Shcherbakov, O. 2020. 'The Welfare Effects of Early Termination Fees in the US Wireless Industry'. London, Centre for Economic Policy Research.