The Disruptive Effect of Open Platforms on Markets for Wireless Services

Application-based discrimination is common in telecommunications. Wireless carriers charge consumers more per byte of traffic for SMS text messages than they do for wireless surfing or voice calls. Such discrimination is possible because carriers and handset manufacturers have the ability to tag and meter each application. While tagging and metering are possible in the case of proprietary platforms such as iPhone, they are not in the case of open platforms like Android. Android is open source with open application programming interfaces, and anyone can develop applications for it. Because the carriers have little control over applications, Android is inherently disruptive of discriminatory pricing across applications. Users and neutrality advocates support Android, believing that a disruption of discrimination can increase consumer surplus. We show why their belief does not always hold. Similarly, firms are expected to prefer discriminatory pricing. We show that this expectation is also not true under certain circumstances.