The Impact of Mobile Number Portability on Switching Costs and Pricing Strategy

Abstract

The purpose of this paper is to examine the effectiveness of Mobile Number Portability (MNP) on pricing strategies by mobile carriers. This market-level exogenous shock serves to intensify price competition and to facilitate the growth of small operators by reducing switching costs. Most European countries introduced MNP in the early 2000s, and this context provides a natural setting for investigating the relationship between price trends and switching costs. Classical theories suggest that switching costs have an ambiguous effect on price change, and this indicates that empirical tests are necessary to understand the effect of MNP on price. Using 47 mobile carriers’ quarterly data from 15 European countries in the period from 1999 to 2006, our empirical tests demonstrated that MNP implementation decreased a price by 7.6 percent, on average, by using fixed effects specification with robust-clustering standard errors. In addition, we found that porting time and porting charge in the MNP provision were significantly associated with the effectiveness of MNP. According with this finding, the European Union forced the Member States to update their domestic legislations by which the porting time is reduced and other disincentives in consumers’ switching decisions are alleviated in November 2009. Some countries acted earlier than others during 2007-2009, so we briefly examined the effect of these earlier updates of MNP provisions. This evidence sheds light on the role of switching costs with respect to MNP. Our findings accord with the current legislative move of the European Union and has implications for the regulatory authorities of countries where MNP has recently been introduced or where there are plans to implement it in the future.