Publication Type

Journal Article

Publication Date

2010

Abstract

In addition to the wireless telephony boom, a similar exponentially increasing trend in wireless data service—for example, short message service (SMS)—is visible as technology advances. We develop a structural model to examine user demand for voice service and SMS. Specifically, we measure the own- and cross-price elasticities of these services. The cross-price elasticity is of significant importance because marketing activities are critically influenced by whether the goods are substitutes or complements. The research context poses significant econometric challenges due to three-part tariffs and sequential discrete plan choice and continuous quantity choice decisions. Using detailed individual consumption data of more than 6,000 customers, we find that SMS and voice service are small substitutes. A 10% increase in the price of voice minutes will induce about a 0.8% increase in the demand for SMS. The own-price elasticity of voice is also low, to the order of approximately –0.1. Younger users' demand is far more inelastic than that of older users. We then conduct counterfactual policy experiments that fully capture the effects of changes in key parameters on the firm's revenues. Finally, we discuss the generalizability of our framework.

Keywords

wireless communication, price elasticity, short message service (SMS), structural model, nonlinear tariff, substitutes versus complements, policy experiments

Publication

Management Science

Volume

56

Issue

2

First Page

234

Last Page

252

ISSN

0025-1909

Identifier

10.1287/mnsc.1090.1091

Publisher

INFORMS

Additional URL

http://dx.doi.org/10.1287/mnsc.1090.1091

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