| Switching costs are considered in the long distance industry. While latent, the impact of switching costs is observed in the reluctance of consumers to switch carriers when there are savings from doing so. Switching costs act as a barrier to switching and consequently limit competition. The influence of switching costs on individual switching decisions, taken collectively, will impact industry price and profitability.; Switching costs are estimated using a unique estimation methodology developed for the study. Bounds are used to identify switching costs. There are two main benefits: (1) bounds impose structure on the modeled switching decision; (2) bounds narrow the identification region of the switching cost distribution. The model is an application of revealed preference theory. Observation of the outcome of individual switching decisions reveals individual bounds (i.e., if a consumer switches, switching gains are greater than switching costs; conversely, if a consumer does not switch switching costs are greater than switching gains).; A rich data set collected in late 1998 and early 1999 are available to the study with long distance consumption and demographic details for about 63,000 households. Switching costs are estimated using the method of maximum likelihood where the likelihood function is assumed to be lognormal. The lognormal function reflects the nonnegative nature of switching. Switching costs are estimated to be approximately {dollar}11.92 per month, on average, with a standard deviation of {dollar}5.85 per month. |
