Research On Transfer Cost Impact On Market Competition

In lots of industries and markets, consumers are usually faced with switching costs invaried forms. Switching costs have great influence on the market conduct of the suppliersand on the consumers’ surplus. Recently, more and more regulatory policies which aim ateliminating switching costs have been carried into execution. On November22nd,2010,the telecommunication regulatory policy “Wireless Number Portability”, which requirescellular phone service providers to allow customers who switch service subscriptions toretain their original phone numbers, was brought to effect in Hainan and Tianjin. The rightto retain the number lowers the switching cost for a consumer. The purpose of the policy isto induce more competition and facilitate the growth of new or small service providers.The analysis in paper was based on the traditional Hotelling spatial competition model, andused Game Theory system and mathematical method.The Hotelling model withconsumers’ restricted reservation price and switching costs demonstrates that considerableproduct horizontal differentiation enables duopolistic firms to monopolize their respectivesubmarkets, and sufficiently significant switching costs can generate self-enforcingcollusion between the two competitors. The application of the regulation policy “two-waynumber portability”, which aims directly at decreasing switching costs, has no effect on themarket shares of competitors, whereas the gap of market performance between them willshrink, and the consumer surplus will be improved. It is difficult to run the wirelesstelecommunication industry efficiently under the established market structure and it iscritical to optimize and adjust the market structure. It will break the switching costs intoseveral isolated segments to reduce the barriers and to introduce new competitors, whichcan weaken the market power of the monopolists and improve the total welfare.