Efficacy of Mobile Device Distribution Improvement Act : Long-term Contract and Cap Regulation on Breach Fee

Abstract

Submitted:October 26, 2015 1 st Revision:January 30, 2016 Accepted:February 2, 2016 * 홍익대학교 경제학부 교수 This study analyzes how breach fee under long-term contract and/or cap regulation on the breach fee can affect the impacts of “Mobile Device Distribution Improvement Act" on handset bundle price, average revenue per unit (ARPU), and social welfare. We conduct comparative analysis with an economic model of duopoly competition in price when users are under long-term contract and the breach fee can be regulated. The results show that the Act lowers the equilibrium prices, lower than incumbent price without the Act. Price of non-dominant Mobile Network Operator (MNO) can be lower than poaching price without the Act if significant portion of switching cost is breach fee or the market is significantly asymmetric. Under the significant circumstances, the Act can raise ARPU even though it improves social welfare. By contrast, the Act increases consumer surplus without affecting social welfare if breach fee is the only source of user's switching cost and is capped by the regulation, and more symmetric market and the stronger cap leads to higher consumer surplus. Keyword:Long-Term Contract, Breach Fee, Handset Bundle Price 韓國IT서비스學會誌 第15卷 第1號 2016年 3月, pp.81-96