Switching Costs and Introductory Pricing in the Wireless Service Industry

In this article I analyze the effects of a recent reform intended to decrease switching costs in the cellular industry. The reform, implemented in Chile in 2012, allowed cell phone users to switch operators without any contract restriction while keeping their wireless number. Its aim was the belief that lower switching costs would force incumbent companies to charge lower prices by introducing more competition among them. I test the empirical implications of models of switching costs using individual data on customers' bills and plans. I find that average price decreased by 7.2 percent. Moreover, my results provide evidence that the operators reacted primarily by decreasing the price of on-net plans and by offering handsets with data connectivity at a discounted rate. I also find a decrease in the introductory price discounts that operators offer to new customers. I interpret this result as due to the lower ability of the firms to lock-in customers.