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.