DP8693 The Impact of 'Rollover' Contracts on Switching Costs in the UK Voice Market: Evidence from Disaggregate Customer Billing Data

Author(s): Gregory S. Crawford, Nicola Tosini, Keith Waehrer
Publication Date: December 2011
Keyword(s): bundling, contracts, rollover, switching costs, telecommunications, telephone
JEL(s): C33, C34, L43, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8693

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.