Abstract
I examine whether bundling of telecommunications services makes individuals less likely to switch their service provider because of increased switching costs. Using a detailed survey dataset from the Korea Information Society Development Institute (KISDI), I find that Internet subscribers who previously bundled are less likely to switch their Internet service provider than are those who did not bundle. The results are robust to correction for the potential selection problem through the use of an endogenous treatment model. The finding that bundling reduces the probability of switching service providers and locks-in existing users can have important implications for market competitiveness and consumer welfare.
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Notes
According to the 2010 survey conducted by the Federal Communications Commission (FCC), 70 % of United States broadband users have their broadband bill bundled with at least one other service (Horrigan 2010).
According to the Office of Communications, the United Kingdom’s independent communications regulator, a greater proportion of consumers who subscribed to bundled services regarded a switch of service providers as “fairly difficult” or “very difficult” than did consumers who did not purchase bundled services (Oxera 2010).
Korean individuals who subscribe to dual-play service (DPS)—the bundling of two separate services—receive a 30 % discount on average. Individuals who subscribe to triple-play service (TPS) receive a 33 % discount on average (Jung et al. 2010).
My paper differs from Greenstein and Prince (2014) in that I empirically examine how bundling affects the switching of a service provider, rather than how bundling affects individuals’ decision to continue or discontinue a service.
Before July 2007, only small telecommunications companies were allowed to offer bundled services.
SK, KT, and LG offer high-speed Internet, wireless phones, VoIP, and IPTV services. SK and KT additionally offer landline phones and WiBro services. Major local cable companies offer cable TV, high-speed Internet, and VoIP services. WiBro services are explained in footnote 10.
Korea’s estimated population was 50 million in 2012. Seoul is the capital and is the largest city, with a population of 10 million (2012). Seoul is classified as a Special City. There are six metropolitan cities in Korea: Busan, Daegu, Daejeon, Gwangju, Incheon, and Ulsan. Busan has a population of 3.6 million, Daegu has a population of 2.5 million, Daejeon has a population of 1.4 million, and Gwangju has a population of 1.4 million (2012).
The survey sample intentionally did not include those aged below 20, those aged above 55, those who work for telecommunication companies, those who have a household member who works for telecommunication companies, and those who do not have any control over households’ decisions on choosing telecommunications services. This helps ensure that survey responses accurately reflect the representative household’s telecommunications services decision.
The representativeness of the sample is further discussed in Jung et al. (2010). The sample matches wireless phone service providers’ market share closely. In the sample, wireless phone service market share is as follows: SK 51.2 %, KT 33.2 %, and LG 15.7 %. In July 2010, the estimated wireless phone service market share is as follows: SK 50.7 %, KT 31.4 %, and LG 17.9 %. The local cable company’s high-speed Internet market share is lower in the survey sample. This is attributed to the fact that the survey included only six metropolitan cities.
WiBro service is a mobile wireless broadband service for personal and desktop computers and wireless phones. SK and KT launched WiBro around Seoul on June 30, 2006. Wibro is used primarily in Korea, but other countries (such as Italy and Brazil) use the service as well.
As an example of a sample observation, consider an individual who subscribed to Internet, a landline phone, and a wireless phone, and who bundled Internet with a wireless phone service at the time that the person was surveyed in 2010. This is the person’s current bundle status in 2010. The person’s past bundle status refers to his bundle status at the time just before he subscribed to his Internet and wireless phone bundle. For example, if he purchased Internet, a landline phone service, and a wireless phone service all separately prior to bundling Internet and a wireless phone service, his past bundle status refers to separately purchasing the three services.
Although I unfortunately do not observe the prices for each service, individuals are asked to report the discount (in %) that they received by purchasing services in a bundle when compared to purchasing each service separately. I find that for all observed discount ranges, subscribers who previously bundled are less likely to switch their Internet service provider.
Among the 331 individuals who purchased Internet services separately, 31 individuals purchased some other services as a part of a bundle.
The prior literature on the bundling of telecommunications services has mostly focused on triple-play bundling, which is the bundling of cable television, a landline phone, and high-speed Internet by cable companies (Greenstein and Prince 2014; Janssen and Mendys-Kamphorst 2008; Pereira et al. 2013). As more flexible bundling, including dual-play and quadruple-play, has become widely available, it is important to include these bundles in the analysis.
Individuals can subscribe to more than one bundle, but only 18 individuals out of 1000 individuals have more than one bundle.
Consistent with footnote 13, among the 326 individuals who did not bundle services in the current bundle status, 26 individuals did not subscribe to Internet services.
The results are robust to using linear probability and probit models.
Income categorical variables are dropped from the regressions because they are not jointly statistically significant (Chi square (df = 9) = 3.33, p value = 0.9498). City categorical variables are jointly significant at the 10 % level (Chi-square (df = 4) = 9.19, p-value = 0.0565), and past service provider categorical variables are jointly significant at the 1 % level (Chi-square test (df = 4) = 19.92, p-value = 0.0005).
There are 40 individuals who bundled Internet services in the past status, but do not bundle Internet services in the current status. These 40 individuals are 10.8 percentage points less likely to switch their Internet service provider than are those who purchased Internet separately, but the effect is not statistically significant at the conventional levels.
Burnett (2014) finds the presence of children in the household has a negative effect on the probability of switching the service provider. This result is comparable to my finding that households with two or more members are less likely to switch than are households with one person.
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Acknowledgments
I would like to thank Liran Einav and Tim Bresnahan for their invaluable comments and guidance. I am grateful for helpful comments from seminar participants at Stanford University. I also thank the editor and two anonymous referees for their constructive and insightful comments. The Korea Information Society Development Institute (KISDI) is greatly acknowledged for providing data.
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Lee, S. Does Bundling Decrease the Probability of Switching Telecommunications Service Providers?. Rev Ind Organ 50, 303–322 (2017). https://doi.org/10.1007/s11151-016-9532-1
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DOI: https://doi.org/10.1007/s11151-016-9532-1