Uniform vs Competing Standards: A Structural Analysis of the U.S. Wireless Telecommunications Industry (Job Market Paper)

Abstract

Different regulations to impose compatibility have prompted fierce debates in a wide range of industries around whether a uniform standard is more beneficial than multiple competing standards because of the ambiguous welfare implications of compatibility. This paper studies the potential impact of unifying two incompatible standards for wireless networks on firms’ coverage investment choices, profits, prices, and consumer welfare in the U.S. wireless telecommunications market from 2015 to 2018. I develop and estimate a structural model of consumer choices of wireless carriers and 3G coverage investment to quantify the impact of a compatible network. My model captures two main features of wireless standards. First, since different standards provide different services to consumers, the model allows consumers to prefer one standard. Second, it accounts for the positive network effects among firms under the same standard path. Using counterfactual experiments, I find that a uniform standard is the welfare superior policy, regardless of the technology chosen to unify the wireless network. Whereas the overall producer surplus is higher when moving to uniform wireless networks, not all firms are better off under a uniform network. The counterfactual analysis also underlines a heterogeneous effect of a single standard network on consumers: whether consumers benefit from compatibility depends on the technology chosen. The decline in the consumer surplus under a 3G Universal Mobile Telecommunication System (UMTS) is explained (1) by an increase of the equilibrium prices by two firms that does not compensate for the decline in the network coverages, (2) by customers with existing handsets being stranded with the UMTS standard.