Network competition and consumer churn

This paper examines the nature of connection and churn charges that would arise in a context of network competition. Connection charges are incurred when customers initially connect to a network while churn charges are imposed on customers that disconnect. It is demonstrated that in a competitive equilibrium, the weighted sum of connection and churn charges, rather than their individual levels, is determined. While connection costs are always a factor in determining network prices, churn costs are only relevant when churn is actually expected; but even then only on an expected basis. It is also demonstrated that churn charges do not perform a useful role in encouraging consumers to switch only when it is efficient to do so. Finally, the inter-temporal nature of connection charges is examined and it is demonstrated that such charges will be of an on-going or ‘rental’ nature rather than up-front.  2000 Elsevier Science B.V. All rights reserved.