osewalrus (osewalrus) wrote,

Link Harvest: Broadband Competition and Switching Cost

Almost two years ago, I was testifying at a Federal Trade Commission hearing on broadband competition and opined that one of the problems of relying on competition to limit high prices and crappy service was switching cost. This was greeted with considerable skepticism from the economists present, as they did not believe that there was any significant switching cost inherent in changing providers. "GMail has pretty much solved that problem," said one economist.

So I noted with interest this study that shows that while 3/4ths of respondents say they are "satisfied" or "very satisfied" with their broadband service, 3/4ths (I don't know the overlap) say they would switch providers for better prices or better service except that switching is too much of a pain in the neck. i.e., in econ speak, the switching cost is significant and therefore acts as a serious damper on competition.

The apparent disconnect between the number of respondents saying they are "satisfied" or "very satisfied" and the number saying they would consider switching is explainable in a number of ways. My personal feeling is that it is best exemplified by the old saying "if your expectations are low enough, you're not disappointed." I am satisfied with crappy services if I have no reasonable expectation of better service, and I am satisfied with overpriced service if I have no reasonable expectation of lower prices. In a genuinely competitive market, providers offer better service and lower prices -- at least that is the theory. So the failure of better service/lower cost ISPs in the face of 3/4ths saying they would switch for such a package needs to be explained by something. I conclude that one major contributing factor is switching costs.

I also conclude that the vast majority of economists in DC policy land do not get out much, and that many of them have excellent broadband.

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