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Loyalty policies in telecommunication services

The Portuguese telecom sector is characterised by the widespread use of loyalty clauses consisting of minimum contract periods and heavy early termination charges for consumers. Market players often claim that such clauses allow for otherwise impossible discounts on equipment and installation services ultimately benefiting consumers. However, extinguishing incentives to competition loyalty policies is likely to have the opposite effect. This study by the Portuguese Competition Authority (AdC) analysed the competitive weaknesses of the telecom sector focusing on the widespread use of loyalty clauses. Data gathered from market players shows that more than 72% of the contracts include a loyalty period of 24 months. Loyalty clauses reduce the share of contestable consumers to a small fraction of the market. Incentives to compete are weakened reducing the disciplinary effect on market prices, innovation and quality of service. As a result, consumers are more vulnerable to market power. Other issues addressed by the study include the complexity of terminating a contract and the lack of transparent information. These aspects strengthen the negative effect of loyalty policies on switching. The study concludes with recommendations to the legislator and the sector regulator and corresponding implementation guidelines aiming at increasing market dynamics and competition.