Evaluating the Swedish mobile communications market: Switching costs and network effects

Licentiate thesis, 2010

The Swedish mobile communications market has been facing telecommunication liberalization since 1993. The telecom regulator has implemented many regulations in order to ensure that competition in the mobile communication market is intense and consumers have various choices of services with fair prices. At the same time, the mobile carriers adapt their strategies in order to sustain profit and growth. An important strategy that the carriers use is customers’ lock-in, or increasing switching costs for customers, by utilizing their network effects. This phenomenon affects the competition in the mobile market. Thus, it is interesting to investigate how the Swedish telecommunication regulator deals with this issue and to examine the impact of regulation that has been implemented by the regulator. To examine the impact of regulation, econometric models as a quantitative research strategy are used together with primary and secondary data from 2003-2009. The results of the thesis show that the implementation of Mobile Number Portability (MNP) is not sufficient to reduce switching costs and increase the level of competition. The switching costs remain high for mobile subscribers of the incumbent. The main reason is the existence of termination-based price discrimination, which can create artificial network effects that favor the larger mobile operators. Artificial network effects can distort the effectiveness of MNP since the existing mobile subscribers of larger operators will not switch to other mobile operators due to cheaper average cost of calling. To overcome this problem, the telecom regulator needs to revise the mobile regulations. The thesis recommends a focus on considering bill-and-keep for mobile termination charges. This would possibly result in a more efficient wholesale and retail price structure. The operators will not have an incentive to set different prices between on- and off-net calls if they cannot utilize termination-based price discrimination to create attractiveness for mobile customers. A bill-and-keep scheme can also be used to avoid the bottleneck monopoly problem that usually appears when the calling party pays. It will also eliminate barriers to entry caused by tariff-mediated network effects, and increase competition and welfare in mobile markets in the longer run.