The Effect of Shortening Lock-in Periods in Telecommunication Services

Abstract

We study the welfare implications of shortening the length of the lock-in period associated to triple play contracts using household level data for a period of 6 months from a large telecommunications provider. Using a multinomial logit model to explain consumer behavior we show that, in our setting, shortening the length of the lock-in period decreases the aggregated profit of the firms in the market more than it increases consumer surplus. This result arises because shortening the length of the lock-in period increases churn and the costs to set up service for the consumers that churn and join a new carrier supersede the increase in the consumers’ willingness to pay for service when the length of the lock-in period reduces. We also show that, in our setting, consumers are worse off with shorter lock-in periods if firms react by increasing prices to keep their profits. Therefore, regulators that introduce policies to shorten the length of lock-in periods may also need to consider policies that prevent firms from increasing prices (too much) in order to improve consumer well-being.