How Does Firm Scope Depend on Customer Switching Costs? Evidence from Mobile Telecommunications Markets

Abstract

This paper examines the relative advantages of single-product and multiproduct firms following changes in customer switching costs. Whereas a single-product firm can closely tailor offerings to customers’ needs, a multiproduct firm can create value for customers in the form of flexibility, allowing them to change between product varieties as preferences evolve without needing to switch providers. We argue that this value-creation mechanism is more effective when customers face high switching costs and explore this prediction in the mobile telecommunications sector, using an exogenous policy change (mobile number portability) that suddenly decreases customer switching costs. Our results reveal that when customer switching costs fall, multiproduct firms see lower growth than single-product firms, and entry with a multiproduct offering becomes less frequent than before. The study highlights how customer switching costs can enable or inhibit choices of firm scope. This paper was accepted by Joshua Gans, business strategy.