Abstract:
The utility a consumer realizes from owning a smartphone increases with its operating system (OS) network size. Due to their ability to internalize competition across OSs, telecom carriers choose lower two-year contract prices for smartphones with large OSs. In this paper, I first analyze a two period theoretical model to explain the intuition of multi-network carriers’ pricing strategy. Then I design a structural model of consumer demand and the carrier dynamic pricing game for smartphones, and empirically study the impact of the OS network effect and carriers’ pricing strategy on the smartphone industry. I estimate the model using product level data from August 2011 to July 2013 in the US. I deal with the empirical challenges of dynamic prices for multi-product carriers, high dimension continuous state variables, and asymmetric oligopolistic firms in the estimation. The estimate of the OS network effect in consumer utility is positive and significant. Counterfactual analyses show that the multi-network carriers’ differentiated prices contributed to the smartphone penetration and the OS concentration.