The impacts of network effects and multi-service provision on consumer switching costs in the Swedish telecommunications market

Doctoral thesis, 2012

The Swedish telecommunications market has been liberalised since 1990s. Liberalisation gave an opportunity to several new entrants to enter to the market. Consumers also gained benefits from more telecom providers and services to choose from, and lower telecom prices. The Swedish telecom market is now more competitive than it was in the pre-liberalisation period. However, the telecom market is somewhat different from other markets. Network effects and high consumer switching costs are main features and crucial issues for competition in this market. Incumbent operators tend to use some induced network effects strategies, such as tariff-mediated network effects, local network effects, and multi-service provision to raise switching costs of consumers and gain more competitive advantages. The thesis aims to investigate the impacts of two main strategies of telecom providers, network effects and multi-service provision, on consumer switching costs. The impacts of tariff-mediated network effects and local network effects have been examined in the Swedish mobile communications market. The findings suggest that tariff-mediated network effects can lock-in existing mobile subscribers to larger mobile operators. Interestingly, tariff-mediated network effects could not be used by larger mobile operators to gain new mobile subscribers during the period of study. However, larger mobile operators can potentially utilize tariff-mediated network effects to increase their market share in later stages. In addition, the results show that local network effects can create switching barriers, particularly for customers of larger mobile operators since they receive lower monthly bills than customers of smaller operators. Hence, they are less likely to switch to smaller operators. Furthermore, most of telecom providers in Sweden are multi-service provision providers. They provide various broadband access technologies and several telecom services. The empirical results reveal that mobile broadband (MB) is a substitution service to fixed broadband (FB). Broadband providers can encourage their customers to migrate from MB to FB technology within the same carrier. This suggests that multi-service provision in broadband Internet access can raise consumer switching costs. Additionally, the results also show that multi-service providers can utilize their economies of scope together with a discount to create switching costs for their customers, since consumers tend to buy more telecom services from them. This indicates that the current consumers of these providers are locked in. Search costs and the uncertain costs may also encourage consumers to use the service from the service provider of which they already have experience. Therefore, multi-service providers who have a dominant position in a specific telecom service could utilize their position to encourage their existing customers to buy more services. The thesis provides policy recommendations to reduce consumer switching costs and enhance the level of competition in the telecom market. A bill-and-keep interconnection scheme is proposed to reduce and prevent the potential impacts of tariff-mediated network effects. A bill-and-keep can also hinder incumbents from setting a high termination charge to raise the off-net prices of their rivals. Additionally, revised broadband market definitions should be instituted since there is evidence of substitution between MB and FB. The market for bundle services also needs to be explicitly defined. Precise market definitions will lead to more accurate market analysis.