Assessing the Merits of Early Termination Fees
30 May 2007
By Greg Houston et al.
Early termination fees (ETFs) are frequently applied in contracts for services and products such as cellular telephone service, high-speed Internet access, satellite television programming, residential burglar alarm systems, and retail electricity. However, they have become the subject of both legal and regulatory controversy. For example, in the United States, consumer groups have argued that ETFs limit the scope for consumers to switch between cellular service providers. Indeed, in some states, the use of ETFs in the cellular telephone industry is now restricted or regulated. Similarly, in Australia, there is vigorous debate about the impact of ETFs on consumers in the emerging competitive retail electricity sector. These concerns also have led to regulatory review and intervention.
This chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy discusses the impact of ETFs on consumers and the implications of regulatory proposals to ban ETFs. The authors explain why firms offer fixed-term contracts that involve the imposition of ETFs and the reasons why ETFs can be an effective means by which service providers can manage the cost of customer switching and offer lower retail prices. Although ETFs also have the potential to raise the cost to customers of switching providers, the authors point out that an assessment of the ultimate impact of a particular ETF arrangement on consumers requires more than an analysis of switching costs; it requires a careful analysis of the competitive dynamics in the market in question, including the nature of competition for long-term customer contracts in the first place.
