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

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 n media and telecommunications markets.

Buyer Resistance for Cartel versus Merger *

Abstract Procurement practices are affected by uncertainty regarding suppliers' costs, the nature of competition among suppliers, and uncertainty regarding possible collusion among suppliers. Buyers dissatisfied with bids of incumbent suppliers can cancel their procurements and resolicit bids after qualifying additional suppliers. Recent cartel cases show that cartels devote considerable attention to avoiding such resistance from buyers. We show that in a procurement setting with the potential for buyer resistance, the payoff to firms from forming a cartel exceeds that from merging, and does so by a magnitude that can offset efficiency gains from a merger. Thus, firms considering a merger may have an incentive to collude instead. We discuss implications for antitrust and merger policy

The impact of "rollover" contracts on switching costs in the UK voice market : evidence from disaggregate customer billing data

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

Endogenous product choice : a progress report

Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products offered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of “orthogonal” instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure “quality markups” and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed

The ratchet effect and bargaining power in a two-stage model of competitive bidding

In the model presented, a buyer uses competitive bidding to facilitate her purchase of a good (the primary good of the exchange). Not included in the original purchase is the possible procurement of a good related to the original purchase: the supplementary good. The primary and supplementary goods are closely related; knowing a bidder's cost of producing the primary good implies that the buyer can infer the bidder's cost of producing the supplementary good. I show that a bidding mechanism for the primary good will fail to ensure an efficient allocation if the buyer learns the bid of the winner and the price of the supplementary good is determined through sequential bargaining.

Mechanisms for dividing labor and sharing revenue in joint ventures

Organizing the productive efforts of firms participating in a joint venture involves assigning firms to tasks according to abilities. A multidimensional incentive problem arises when abilities are private information. In any equilibrium, it is better to be a firm who is a specialist rather than a generalist. However, generalists can expect to receive a larger allocation of revenue. If at least one firm is decisive to the profitability of the joint venture (i.e., if it can make a credible cost announcement that implies the joint venture earns zero profit), then the joint venture will not be able to implement a profit maximizing or cost minimizing production plan. Copyright Springer-Verlag Berlin/Heidelberg 2004Mechanism design, joint venture, team production,

The Effects of Mergers in Open Auction Markets

The buyer solicits bids from suppliers with different cost distributions defined by their capacities. The expected market share of each supplier is the ratio of its capacity to the industry capacity. The buyer's optimal reserve price declines with increases in the concentration of the industry. The lower reserve price can partially or fully offset the price effects of a merger. However, a merger still reduces the buyer's welfare because there is an increased probability of internal production at a higher cost. The lower reserve price can also undermine the incentive for larger suppliers to merge and result in stable industry structures for which no further mergers would be profitable.auctions; mergers;