Price Elasticities for Local Telephone Calls

Park, Rolla Edward; Wetzel, Bruce M.; Mitchell, Bridger M.

doi:10.2307/1912113

Cited by 35 publications

(18 citation statements)

References 6 publications

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“…Rappoport and Taylor (1997) report an average elasticity of Ϫ0.44, being much smaller than those found for Tellis' (1988) industries. Kling and Van Der Ploeg (1990) and Park et al (1983) found usage price elasticities for just local calls ranged between Ϫ0.1 and Ϫ0.2. While Madden et al (1993) and Bewley and Fiebig (1988) also found telecommunications prices to be relatively inelastic, they did report that elasticities were higher for the long haul, compared with short-haul toll calls.…”

Section: Price Elasticitymentioning

confidence: 99%

Optimal Pricing of New Subscription Services: Analysis of a Market Experiment

Danaher

2002

Marketing Science

158

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There are now available a number of new subscription services that comprise a dual pricing system of a monthly access fee (rental) and a per-minute usage charge. Examples include cellular phones, the Internet, and pay TV. The usage and retention of such services depend on the absolute and relative prices of this dual system. For instance, a moderate access fee but a low-usage charge might initially appeal to customers, but later a low-usage customer might find the monthly fee unjustified and thereby relinquish the service. Providers of such services, therefore, usually offer several pricing packages to cater to differing customer needs. The purpose of this study is to derive a revenue-maximizing strategy for subscription services, that is, the combination of access and usage price that maximizes revenue over a specified time period. An additional objective is to determine access and usage price elasticities because they have historically played an important role in theoretical pricing models. The application area is the cellular phone market, but for a new rather than an existing product. To help gauge the likely usage rates and customer retention, a field experiment is conducted in which several alternative price combinations are used. Specifically, a sample of potential residential customers (most of whom did not have an existing cell phone) were divided into four treatment groups. The first group were not charged an access fee but did have to pay a small per-minute usage charge. The second group also paid a small usage charge but in addition had three access price increases over the duration of the trial. The third group paid no access fee but had usage charge increases, while the fourth group had both access fee and usage charge increases. Usage levels for each respondent are recorded, as is their month of dropout if they discontinue the service. An initial examination of the data shows that higher access fees result in higher customer attrition, and higher usage cost results in lower usage. Furthermore, usage and retention are related in that declining usage levels over time often signal impending customer attrition. Hence, two phenomena need to be modeled: usage of the service and customer retention conditional on usage. Some seasonal effects are also observed and are allowed for in the model. Modeling customer attrition simultaneously with usage is important because ignoring customer attrition will likely result in an underestimate of price sensitivity. This results from a censoring effect, whereby respondents who remain in the trial tend to be wealthier, and hence, less price sensitive. Given the known problems of ignoring customer attrition, we develop a theoretical model of usage, which explicitly incorporates attrition by extending a time-series model introduced by Hausman and Wise (1979). We make two extensions of the Hausman and Wise model. The first is to generalize it from two to many time periods and the second is to allow for respondent heterogeneity by incorporating latent classes. We fit the mo...

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Section: Price Elasticitymentioning

confidence: 99%

Optimal Pricing of New Subscription Services: Analysis of a Market Experiment

Danaher

2002

Marketing Science

158

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“…Given the substitution effect (b int < 0), the own-price elasticities are negative and the cross elasticities are positive. Several interesting results emerge from this Kling and Ploeg (1990) and Park et al (1983), price elasticity in fixed phone service report is in the range of -0.1. Our estimates show that users are less sensitive to price in mobile voice service than fix phone voice service.…”

Section: Estimated Own-and Cross-price Elasticitiesmentioning

confidence: 72%

“…Taylor and Kridel (1990) makes distinction between access and use of telephones and model them while calculating the price elasticity for telephone demand. Distinguishing the usagee-based (metered) and flat-rate pricing, some researchers investigate how users choose one over the other and also how their demand changes when they choose flat-rate pricing as opposed to usage-based plans (Park et al 1983). Kling and Ploeg (1990) calculates price elasticities given in unique contexts.…”

Section: Relevant Literaturementioning

confidence: 99%

Empirical Analysis of Mobile Voice and SMS Service: A Structural Model

et al. 2009

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“…Not all the studies we encountered have been included. Various reasons can be given Madden et al (1993) report elasticities based on experimental data which we consider incomparable to the real-world elasticities in the table, or Park et al (1983) report a number of interesting results, but not à`p roper'' price elasticity that is comparable to the others in the table. Also some studies that are reported in Taylor (1994) ± our main source for the studies in the table ± were unavailable to us, and the discussion by Taylor did not provide enough information to include them in this study.…”

Section: Empirical Evidence Of the Distance Dependence Of The Price Ementioning

confidence: 92%

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

Ouwersloot

Rietveld

2001

Ann Reg Sci

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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

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Price Elasticities for Local Telephone Calls

Cited by 35 publications

References 6 publications

Optimal Pricing of New Subscription Services: Analysis of a Market Experiment

Optimal Pricing of New Subscription Services: Analysis of a Market Experiment

Empirical Analysis of Mobile Voice and SMS Service: A Structural Model

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

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