  Do switching costs reduce or intensify price competition in markets where
firms charge the same price to old and new consumers? Theoretically, the answer
could be either "yes" or "no," due to two opposing incentives in firms' pricing
decisions. The firm would like to charge a higher price to previous purchasers
who are "locked-in" and a lower price to unattached consumers who offer higher
future profitability. I demonstrate this ambiguity in an infinite-horizon
theoretical model.
  800- (toll-free) number portability provides empirical evidence to answer
this question. Before portability, a customer had to change numbers to change
service providers. This imposed significant switching costs on users, who
generally invested heavily to publicize these numbers. In May 1993 a new
database made 800-numbers portable. This drop in switching costs and
regulations that precluded price discrimination between old and new consumers
provide an empirical test of switching costs' effect on price competition.
  I use contracts for virtual private network (VPN) services to test how AT&T
adjusted its prices for toll-free services in response to portability.
Preliminarily (awaiting completion of data collection), I find that AT&T
reduced margins for VPN contracts containing toll-free services relative to
those that did not as the portability date approached. This implies that the
switching costs due to non-portability made the market less competitive. These
results suggest that, despite toll-free services growing rapidly during this
time period, AT&T's incentive to charge a higher price to "locked-in" consumers
exceeded its incentive to capture new consumers in the high switching costs era
of non-portability.
