Network Competition and Consumer Churn by.pdf

Network Competition and Consumer Churn* by Joshua S. Gans University of Melbourne First Draft: 20th August, 1999 This Version: 24 December 1999 This paper examines the nature of connection and churn charges that would arise in a context of network competition. Connection charges are incurred when customers initially connect to a network while churn charges are imposed on customers that disconnect. It is demonstrated that in a competitive equilibrium, the weighted sum of connection and churn charges, rather than their individual levels, is determined. While connection costs are always a factor in determining network prices, churn costs are only relevant when churn is actually expected; but even then only on an expected basis. It is also demonstrated that churn charges do not perform a useful role in encouraging consumers to switch only when it is efficient to do so. Finally, the inter-temporal nature of connection charges is examined and it is demonstrated that such charges will be of an on-going or ‘rental’ nature rather than up-front. Journal of Economic Literature Classification Numbers: L11, L14 and L51. Keywords. network competition, connection costs, customer churn, and up- front fees. * I thank Stephen King for helpful discussions and the Australian Competition and Consumer Commission for financial assistance. All views in this paper are mine and do not reflect the views of any of the above individuals or organisation. Also, responsibility for all errors and omissions lies with me. All correspondence to: Joshua Gans, Melbourne Business School, 200 Leicester Street, Carlton, Victoria 3053, Australia; E-mail: J.Gans@.au. The latest version of this paper is available at .au/jgans. 2 This paper examines the pass-on of consumer connection and churn costs to consumers. In many network industries it has become apparent that when consumers