TILEC Work In Progress: Michela Bonani
Mandated vs Market-Based Standards: A Structural Analysis of the US Wireless Telecommunications Industry
Compatibility is recognized to be a socially desirable outcome but the welfare implications from mandating compatibility are still ambiguous. This paper studies the effect of mandating compatibility in the U.S. wireless telecommunications market from 2015 to 2018. I develop and estimate a structural model of consumer choice of wireless carriers and coverage investment to quantify the impact of a mandated standard policy on market outcomes and welfare. Using counterfactual simulations, I find that mandating compatibility is the welfare superior strategy, regardless of the technology chosen. While firms benefit from moving to uniform wireless networks, whether consumers are better-off depends on the technology standard mandated by the government. Under a GSM regime, consumer surplus decreases by $2.7 billion, coverage decreases by 20.01%, and prices increase for two wireless carriers. Under a CDMA compatibility policy, consumer surplus increases by $2.2 billion, coverage decreases by 9.78%, and prices fall for all four major carriers.