Demand for telecommunication services in developing countries

Living standards and economic growth in developing countries are invariably linked to the availability and use of telecom services. Effective policy decisions require the best estimates of the drivers of these services. In this paper, telecommunications demand is estimated in models for residential mainline and mobile telephone service for developing countries for the period 1996–2003. The paper tests for cross-price effects between mainline and mobile service and its findings have important policy implications. It finds residential monthly price elasticity to be insignificant for developing countries, but the connection elasticity is larger than generally found in the literature. Mobile monthly price elasticities are very large. A new and important empirical finding is that although wireline phones are substitutes in the mobile market, the contrary is not true—mobile phones are not substitutes in the wireline market, and in fact may be considered complements. This lack of symmetry has important implications for properly defining telecom markets. Universal service subsidies and competitive market initiatives should be reevaluated in light of the paper's elasticity estimates. Increased competition, income growth and enhanced education may be the ultimate universal service promoters.     

The effect of online shopping channels on brand choice,product exploration and price elasticities

This paper analyzes the effect of an online shopping channel on private label purchases, product exploration and price elasticities. Variation in the timing that an online shopping service was introduced is utilized as a source of exogenous variation in the decision to shop online. Event study estimates indicate a 0.3 to 1.0 (1.0 to 2.0) percent increase (reduction) in the proportion of private label (new) products purchased after the introduction of the online shopping service. Price elasticities are then estimated utilizing an Exact Affine Stone Index (EASI) demand model. Comparisons of in-store and multichannel price elasticities indicate that households are, on average, less price sensitive when shopping across both the in-store and online channels. Own-price (cross-price) elasticities are 1.07 (5.56) times larger in-store than they are in a multichannel setting. These findings suggest that retailers manipulate the online search platform and(or) the provision of substitutes to favor private label products, which have a higher margin. Additionally, these results suggest that retailers may find it profit maximizing to raise prices as consumer baskets become more sticky in the multichannel purchasing regime.     

Disconnecting: Understanding decline in universal service

At a time when choices for voice service and funding for universal service were growing, the United States experienced an unprecedented drop in household telephone penetration. Universal service in voice telephony is generally taken for granted in the United States. However, recent data from the FCC shows a significant decline in the number of U.S. households that have a telephone of any kind (including mobile), from a peak in telephone penetration of 95.5% in March 2003 down to 92.9% in November 2005. This decline is both statistically significant and meaningful, as approximately 2.6% of U.S. households could not easily reach 911 for emergencies. This study uses regression analysis of state-level data to determine what drove this decline in universal service. The results demonstrate that the recent decline in universal service in the U.S. is driven by an increase in black population, inadequate consumer protection laws, and increases in wireless telephones per capita. Lifeline effectiveness does not appear to mitigate the decline in penetration, while Link-Up effectiveness may have a limited effect.     

Moving targets: Introducing mobility into universal service obligations

Structural changes in the economies of developing countries are leading to increased mobility of work and family life, and so an accommodating set of universal service obligations (USOs) implies new goals that extend beyond wireline telephone penetration and access. Wireless telephony penetration frequently exceeds wireline penetration in developing countries, and digital wireless platforms can incorporate Internet technology. This paper evaluates the history of telecom development in Mexico that has led to wireless telephony becoming the new consumption norm. The study takes the eMexico project as a case study of diversified USOs beyond wireline telephony. It considers potential obstacles to incorporating mobile phone and Internet (“Wireless Web”) services into Mexico's diversified universal service policy, including economic barriers to political mobilization over issues of telecom policy.     

The phoneless in the broadband age: A pilot study in Massachusetts

Questions about universal service continue to evolve as information and communication technology advances, bringing new platforms, services, and business models. Concerns about exclusion remain, particularly in times of transition to new technologies and platforms. While the universal service literature is rich in econometric studies that indicate the drivers of household telephone penetration, without qualitative data directly from those households that experience phonelessness, we cannot understand the causes well enough to design effective policy. This research explores why people are phoneless in the current environment of increased platform and business model choices. Particular focus is placed on understanding the relationship between new technology, platforms and business models and phonelessness. Data is obtained from surveys completed by approximately 100 individuals in Massachusetts who are currently without any voice connection, either landline or mobile, or have been sometime in the past ten years. The survey includes questions about different platforms and communication services in order to learn how they have led to phonelessness. The results of the pilot study show that the vast majority of phoneless households do not choose to be phoneless. The study also shows that the most frequent causes of phonelessness in this population are unemployment and unpredictable bills. Many instances of unpredictable bills leading to phonelessness occur with wireless service or bundled services but are the result of business models for service provision rather than the platforms themselves. Prepaid wireless service is a market-based solution that helps households prevent phonelessness by reducing unpredictability. Universal service policy for voice and broadband can better reduce exclusion with greater attention to business models and practices versus technologies and platforms, and increased emphasis on prepaid service to reduce unpredictability.     

Whose call is it? Targeting universal service programs to low-income households’ telecommunications preferences

Do universal service programs give customers what they want? This paper uses new survey data to study low-income households’ telecommunications choices in the United States and to consider the degree to which such households’ preferences are addressed by existing universal service programs. The research shows that households that choose only one form of telecommunications increasingly are choosing a mobile phone, while those that choose to have both modes of communications are shifting their usage towards their mobile phones. These trends are less pronounced among higher-income households. One implication for universal service policy is that traditional subsidies for landline phones are increasingly ineffective in reaching low-income households such subsidies are designed to help; subsidies for acquiring and using mobile phone services might be more beneficial to low-income households than traditional subsidies for landline phones.     

Recent developments in US wireline telecommunications

This article presents a selective survey of several recent developments in the US market for wireline telecommunications services spanning the 2003–2005 period. Specifically, the article discusses the recent decline in overall telephone penetration rates, the substitution between wireline and wireless telephony, intermodal competition issues raised in the context of the FCCs review of the Cingular/AT&T Wireless merger, and the potentially anticompetitive effects of incumbent local exchange carrier tying of voice and DSL service. The article identifies several areas for future research motivated by each one of these developments.     

What is the magnitude of fixed–mobile call substitution? Empirical evidence from 16 European countries

This paper investigates the degree of fixed–mobile call substitution (FMCS) within different European countries. We use quarterly data from 2004 to mid-2010 on 16 mainly Western European countries. By applying dynamic panel data techniques, we are able to estimate short- and long-run elasticities of the telecommunication usage prices on the fixed-line call demand. The own-price and cross-price elasticities found give strong empirical evidence for substitutional effects towards mobile services. In particular, the estimated cross-price elasticities of the mobile price on the fixed-line call demand are relatively large compared to other studies.     

What level of dialtone penetration constitutes ‘universal service’?

This paper focuses on estimating whether a natural level of non-penetration exists, and if so, what the maximum attainable penetration rate is. Universal service penetration levels have steadily increased over the last decade. This paper hypothesizes that penetration levels will level off over time at some point below 100%. Econometric models have been created to estimate penetration rates as a function of several explanatory variables, including per capita personal income, price changes for residential local service, price changes for toll services, and the existence of lifeline programs. The modeling results also provide information on cross-elasticities between toll and local service and the effects of the FCC's subscriber line charges and lifeline programs on the universal service policy goal. In summary, this research provides new information on the topic of what constitutes universal service and provides considerable data regarding own-price and cross-price elasticities associated with residential local service.     

Market Structure and Broadband Internet Quality

This paper investigates the effects of the number of firms and their product‐type on broadband Internet quality. We estimate a model that relates the actual speeds delivered, in census block groups to the number of wireline and wireless internet service providers (ISP's), cost and demand conditions, and correction terms for the endogeneity of market structure. Model estimates show four main findings. Wireline speeds are often higher in markets with two or more wireline ISP's than with a single wireline ISP. Excluding the correction terms from the analysis understates this effect. Increases in wireline speeds are larger in the upstream direction, and there is no relationship between wireline speeds and the number of wireless ISP's.     

Estimating the impact of low-income universal service programs

This policy study uses U.S. Census microdata to evaluate how subsidies for universal telephone service vary in their impact across low-income racial groups, gender, age, and home ownership. Our demand specification includes both the subsidized monthly price (Lifeline program) and the subsidized initial connection price (Linkup program) for local telephone service. Our quasi-maximum likelihood estimation controls for location differences and instruments for price endogeneity. The microdata allow us to estimate the effects of demographics on both elasticities of telephone penetration and the level of telephone penetration. Based on our preferred estimates, the subsidy programs increased aggregate penetration by 6.1% for households below the poverty line. Our results suggest that automatic enrollment programs are important and that Linkup is more cost-effective than Lifeline, which calls into question a recent FCC (2012) decision to reduce Linkup subsidies in favor of Lifeline. Our study can inform the evaluation of similar universal service policies for Internet access.     

The Other Side of Eight Mile: Suburban Population and Housing Supply

This article establishes a linkage between decadal changes in suburban population and the supply of suburban dwelling units. It then estimates an econometric supply-and-demand model for 317 U.S. suburban areas for the 1970s, 1980s and 1990s using the State of the Cities database. Suburban supply is more elastic than central city supply, with suburban estimates between +1.26 and +1.42. However, separate estimates by geographic region lead to supply elasticities of +0.89 for the northeastern quadrant of the United States and +1.86 for the remainder of the United States.     

Quality-adjusted international price comparisons of mobile telecommunications services

Many countries' policymakers have conducted international price comparisons of mobile telecommunications services to prevent service operators from overcharging subscribers. However, those comparisons have become more complicated because of the escalation in service usage and telecommunications expenditures spurred by the proliferation of smartphones and broadband LTE wireless internet service networks. The basket-based methodologies that have been widely used for international price comparisons are also limited—first, because the baskets for comparison may not be representative of actual service usage patterns in some countries; second, because they are difficult to apply to highly differentiated service plans due to the significant increase in wireless internet service usage and widely used plans with unlimited voice call service and SMS/MMS; and third, because they cannot consider the quality of service, such as upload and download speed in various service environments, at all. As an alternative, this paper proposes a hedonic pricing model that accounts for service quality and its variation in potentially disruptive environments, as well as fixed charge for a mobile phone additional to the price of service plans. The model was used to derive quality-adjusted price indices of mobile telecommunications services for twelve cities in ten countries with broadband LTE wireless internet service. The empirical results confirmed that the price index of each city varied significantly across the specifications,—both within the United States and internationally—depending on whether the model was constructed to reflect service quality and its variation on roads, in buildings, and in subways. The price index of each city also varied depending on whether the subsidized price of a mobile phone was considered part of the monthly price of a service plan. These results have important implications for policymakers seeking to understand the ultimate level of mobile telecommunication service prices for their country in a global context.     

Estimation of the Rental Adjustment Process

Rental adjustment equations have been estimated for a quarter century. In the United States, models have used the deviation of the actual vacancy rate from the natural rate as the main explanatory variable, while in the United Kingdom, drivers of the demand for space have dominated the estimation. The recent papers of Hendershott (1996) and Hendershott, Lizieri and Matysiak (HLM 1999) fall into the former category. We reestimate these equations using alternative formulations and present evidence that changes in real interest rates were not capitalized into Sydney and London real land prices. We then derive a model incorporating supply and demand factors within an Error Correction framework and show how the U.S. and U.K. traditions are special cases of this more general formulation. We next estimate a two-equation variant with a separate vacancy rate equation using data from the City of London office market. This model allows calculation of the underlying price (rent) and income (employment) elasticities and explains the data marginally better than the HLM model. Importantly, our model passes standard modern econometric requirements for unit roots and cointegration.     

Did federal regulation discourage facilities-based entry into US local telecommunications markets?

In the United States from 2001 to 2006, federal regulations allowed entrants to lease from incumbents at relatively low cost all of the network infrastructure necessary to provide local phone service. These platform entrants could then provide phone service without installing any of their own equipment. Advocates of this policy claimed that it was needed to provide an economically feasible means by which entrants could serve residential customers. Critics contended that the policy substantially deterred loop entry whereby entrants installed their own switching equipment. An analysis of panel data for each state over this period indicates that the policy's critics may have been correct. The cross-price elasticity of loop entry with respect to platform price was roughly 1.0. A back of the envelope calculation suggests that loop entry may have decreased by roughly 20% due to platform entry price reductions.     

Impacts of mobile Internet use intensity on the demand for SMS and voice services of mobile network operators: An empirical multi-method study of German mobile Internet customers

Scholarly and business publications alike convey the message that past and future strong growth in mobile Internet (MI) access and service demand has solely positive commercial implications for mobile network operators (MNOs). This position neglects the possibility that increasing MI use intensity may lead to demand decreases for the highly profitable short messaging service (SMS) and mobile voice telephony. The extant literature provides few insights on relations between MI use intensity, on the one hand, and SMS as well as mobile voice call use intensities, on the other hand. This study developed hypotheses concerning the presence or absence of impacts of MI use intensity and circumstances of MI use (e.g., device type, tariff scheme) on the demand for SMS and mobile voice telephony at the individual customer level. The hypotheses were tested by analyzing actual use behaviors of 304 MI adopters in Germany, for whom objective use intensity data were extracted from the billing system of an MNO. These non-reactive measures were combined with responses collected from the adopters through a telephone survey. Multivariate regression results suggest that though MI use intensity significantly negatively affected both number of SMS sent and received, these effects were so small that their practical relevance is highly doubtful. Further, customers who used MI more intensively did not generate lower volumes of outgoing or incoming mobile voice connection minutes. Conclusions are drawn for MNO, telecommunications sector regulators and scholarly researchers seeking to explain the acceptance of mobile communications services.     

Intermedia Substitutability and Market Demand by National Advertisers

We assess substitute and complementary relationships among eight national advertising media classes, as well as the magnitude of their own-price elasticities. We employ a translog demand model, whose parameters we estimate by three-stage least squares, based on 1960–94 annual U.S. data.We find aggregate demand by national advertisers for each of the eight media isown-price inelastic, and that cross-price elasticities suggest slightly more substitutethan complementary relationships, although both are rather weak. These patterns areconsistent with long prevailing institutional arrangements and media selection practices.     

The implications of heterogeneous habit in consumer beverage purchases on soda and sin taxes

In this article, we study the heterogeneity of habit strength in households’ demand for regular carbonated sweetened beverages (CSBs) and beer in the United States. A demand model that nests a smooth transition function is used to describe habit-based consumption patterns, revealing heterogeneous strengths of habits among households. We find that more habitual consumers, those with a strong preference for a particular product, are not as sensitive to price or expenditure as the aggregate population. This finding is further supported by simulations of the potential effects of soda and beer taxes. We find the aggregate response to soda and beer taxes is smaller than when the influence of habit is assumed to be homogeneous.