Handset Subsidy Regulation, Replacement of Handsets, and Quality Investments

Abstract

The regulatory agency's intervention in carriers' handset subsidization is based on an argument that carriers tend to provide excessive handset subsidies, and thus have a low incentive either to invest in quality enhancement or to compete in service charges. This paper examines this issue rigorously. It argues that in the case of subsidization for intra-service handset replacement, the handset subsidy regulation can achieve efficiency. Surprisingly, however, the paper demonstrates that in the environment of subsidization for inter-service handset replacement, the handset subsidy regulation is irrelevant in that it has. no effect on consumer's replacement decision and carriers' incentive for quality enhancing investments. This result implies that the effective charge regulation rather than the handset subsidy regulation can attain efficiency.