An empirical analysis of mobile voice service and SMS: A structural model

Youngsoo Kim, Rahul Telang, William B. Vogt, Ramayya Krishnan

Research output: Contribution to journalArticlepeer-review

37 Scopus citations

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 counter-factual 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.

Original languageEnglish
Pages (from-to)234-252
Number of pages19
JournalManagement Science
Volume56
Issue number2
DOIs
StatePublished - Feb 2010

Keywords

  • Nonlinear tariff
  • Policy experiments
  • Price elasticity
  • Short message service (SMS)
  • Structural model
  • Substitutes versus complements
  • Wireless communication

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