Switching Costs
Suppose there is a new mobile service provider who is hoping to take some subscribers away from an incumbent in a market with switching cost. The incumbent charges $p per month, and incurs a cost of c per subscriber. These numbers are the same for the new entrant. Assume there is no difference in quality of the service provided by the two firms. Also assume that once a consumer switches, s/he stays forever with the service provider.
Let us use the following notation:
p is the monthly payment made by a subscriber
c is the cost of serving one subscriber
s is the switching cost of a subscriber (the monetary value of inconvenience in switching)
g is the amount of “goodies” (e.g., cash back, free phones, etc.) provided by the new entrant
r is the monthly discount or interest rate (e.g., 1%)
A subscriber has to decide whether to switch to the new service provider. S/he will switch only if (p - g) + s + p/r < p + p/r
(p - g) is what s/he pays now, and s/he also incurs a......
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Approximate Pages: 4 (250 words per double-spaced page)
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