Switching costs and cell phones

Nice article in the NY Times on the switching cost of cell phones.  Yes, economic theory really does work.

You would think that there were few barriers to switching cellphones. But the carriers try to make it harder to switch by locking customers into two-year contracts with high early-termination fees. And each handset maker also inspires loyalty by continually making improvements in its phones, as Apple announced last week for its iPhone. Some people may complain incessantly about their iPhone and AT&T's service for it, but not that many are switching. And that's just the way the companies have intended it.

...

In a classic bit of economic sleuthing, Minjung Park, an assistant professor of economics at the University of Minnesota, looked at the impact of the Federal Communications Commission's mandate that customers could keep their phone numbers when they switched carriers, starting in late 2003 in large markets and mid-2004 in smaller ones. (The phone companies had fought the decision because nonportability had been a very effective way to hold onto customers.)

She examined more than 100,000 calling plans and found that the prices of wireless plans dropped by as much as 6.8 percent in the seven months after the rule change. After adjusting for the overall trend in wireless prices, she calculated that the savings totaled $845 million during that period.

The article goes on to point out that economic theory would also predict that once they have you locked-in to the a particular phone technology (e.g. iPhone) they will raise the price on you.

Yep.