On the distance dependence of the price elasticity of telecommunications demand; review, analysis, and alternative theoretical backgrounds

Abstract

The positive correlation between the absolute price elasticity of telecommunications demand and the distance of the calling relation is often suggested and presented as an empirical regularity. In this paper we ®rst present an overview of existing studies to buttress the distance dependence empirically. A statistical analysis of the results con®rms the existence of distance dependence, and gives insight into the size of the e¨ect: doubling the distance leads to an increase of the elasticity of 0.07.Next we look for various explanations of the distance dependence. We analyze the roles of the functional form of demand functions in conjunction with the dependence of price on distance, and consider whether spatial interaction theory can provide an explanation. One of the interesting ®ndings is that the price e¨ect may explain the distance dependence, but that this explanation is not unequivocal. In addition we show that incorporating spatial interaction theory elements in a quite basic utility maximization model of information demand also leads to distance dependent telecommunications demand.JEL classi®cation: L96

The ties that bind: the role of migrants in the uneven geography of international telephone traffic

“…That we account for other well-known distance-dependent variables in our research design, namely trade, investment, migration and tourist flows (see for example Parsons et al 2007;Portes et al 2001), suggests that the influence of distance is not mainly operating through mechanisms associated with these relational attributes. Higher calling costs could deter longer distance telephony, or distance could capture the general tendency of individuals to be less acquainted, personally or professionally, with people living in countries farther away (Ouwersloot and Rietveld 2001). The coefficient for a further measure of spatial proximity, contiguity, fails to achieve statistical significance at conventional levels.…”

“…This could be because telephony and physical travel are substitutes, i.e. rather than travelling to meet with family, partners and friends in person, migrants further away might satisfy their demand for communication remotely through telephone calls (Falk and Abler 1980;Ouwersloot and Rietveld 2001). Alternatively, it could be that physical distance increases migrants' sense of isolation and detachment from place, fuelling their desire to connect with people from their territorial homeland via telecommunications (Hiller and Franz 2004: 733).…”

“…Previous work has found that international calling falls as the distance between the countries of the caller and recipient grows (Choi 1995;Rietveld and Janssen 1990;Sandbach 1996). Most likely, this is because (a) long-distance calling may be more expensive and (b) individuals living further away are less likely to share associative ties with one another and to form part of a 'community of interest' (Ouwersloot and Rietveld 2001). 4 In the present study, we use two measures of spatial proximity -(a) physical distance in miles between the country pair's capital cities and (b) contiguity, measured using a dummy variable for dyads sharing a land border or being separated by fewer than 150 miles of sea.…”

“…The influence of proximity on the marginal impact of migrant stocks is theoretically ambiguous. Physical proximity could increase international calling if the higher costs of longer distance calling deters remote telephony, or if the strength of ties between migrants and homeland communities are stronger because travel and telephony are complements, and distance reduces the amount of physical travel (Kellerman 2006;Larsen et al 2006;Ouwersloot and Rietveld 2001). On the other hand, it could be that telephone traffic increases with growing distance between the source and destination countries of international migrants.…”

“…It could be that higher calling costs deter longer-distance telephony, or that distance captures the general tendency of individuals to be less personally or professionally acquainted with people living in countries further away (Ouwersloot and Rietveld 2001). The coefficient for a further measure of spatial proximity, contiguity, fails to achieve statistical significance at conventional levels.…”