Monday, July 1, 2013
Posted by D. Daniel Sokol
Daegon Cho, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management, Pedro Ferreira, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; Carnegie Mellon University - Department of Engineering and Public Policy and Rahul Telang, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management discuss The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare.
ABSTRACT: This paper examines the effect of Mobile Number Portability (MNP) on market price, competition and consumer welfare. MNP allows consumers to keep their phone number when they change carrier thus reducing switching costs. However, theory shows that the market equilibrium price can either increase or decrease when switching costs reduce and thus empirical tests are necessary to better understand their effect on market performance. Most European countries introduced MNP in the early 2000s, which provides an opportunity to study the relationship between switching costs and price. MNP in Europe has been mandated by the European Commission and enacted in each country as an exogenous shock. In fact, we perform a number of tests showing that the introduction of MNP is unrelated to local market conditions. Using quarterly data from 47 mobile carriers in 15 European countries between 1999 and 2006, we show that MNP intensified competition leading to an increase in consumer surplus. On average, the introduction of MNP decreased price by 7.9%. Policies that require faster and cheaper MNP were also more effective in this respect. Furthermore, market followers seem to have decreased price more than incumbents did when MNP was introduced. MNP also increased competition by reducing the incumbent's market power and by tightening the range of prices practiced. We measure changes in consumer surplus by estimating the price elasticity of demand. Our results suggest that, on average, MNP increased consumer welfare by 2.86 euros per person. Our study shows that MNP is an effective policy to reduce price and increase consumer surplus and that the European experience can be used as an example of a best practice by other countries that plan to introduce MNP in the near future.