Network Effects and Switching Costs in the US Wireless Industry

I develop an empirical framework to disentangle different sources
of consumer inertia in the US wireless industry. The use of a
detailed data set allows me to identify preference heterogeneity
from consumer type-specific market shares and switching costs from
churn rates. Identification of a localized network effect comes
from comparing the dynamics of distinct local markets. The central
condition for identification is that neither the characteristics
defining consumer heterogeneity nor the characteristics defining
reference groups are a (weak) subset of the other. Being able to
separate switching costs and network effects is important as both
can lead to inefficient consumer inertia, but depending on its
sources policy implications may be very different. Estimates of
switching costs range from US-$ 316 to US-$ 630. The willingness to
pay for a 20%-point increase in an operator’s market share is on
average US-$ 22 per month. My counterfactuals illustrate that both
effects are important determinants of consumers’ price elasticities
potentially translating into market power that helps large carriers
in defending their dominant position.