DP15506 The Welfare Effects of Early Termination Fees in the US Wireless Industry

Author(s): Joseph Cullen, Nicolas Schutz, Oleksandr Shcherbakov
Publication Date: November 2020
Keyword(s): dynamics, perfect foresight, structural estimation, Switching Costs
JEL(s): D12, L11, L13, L40, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15506

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.