Review of price elasticities of demand for fixed line and mobile telecommunications services

Review of price elasticities of demand for fixed line and mobile telecommunications services August 2003 Table of Contents Section Page 1. Intro...
Author: Edmund Skinner
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Review of price elasticities of demand for fixed line and mobile telecommunications services

August 2003

Table of Contents Section

Page

1.

Introduction.............................................................................................. 1

2.

Issues considered in inferring price elasticity of demand.................. 2 2.1.

3.

4.

Issues in estimating price elasticities of demand for mobile services 3

Results of international studies............................................................. 6 3.1.

Summary ............................................................................................ 6

3.2.

Assumed levels .................................................................................. 7

3.3.

International studies ........................................................................... 7

Factors relevant to New Zealand and conclusions ........................... 37

Appendix 1: Interpreting price elasticity of demand estimates............... 40 Appendix 2: Bibliography ............................................................................ 42

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

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1.

Introduction

This paper summarises the findings of a selection of relevant studies of the price elasticity of demand for certain fixed line and mobile telecommunication services. This exercise has been undertaken in the context of the New Zealand Commerce Commission’s consideration of the allocation of the costs of the Telecommunications Service Obligation (TSO). This paper is structured as follows: •

Section 2 identifies some of the key issues surrounding the estimation of price elasticities of demand for fixed line and mobile telecommunications services;



Section 3 outlines the results of a selection of international studies of price elasticity of demand for certain services; and



Section 4 reviews factors that should be taken into account in determining the applicability of international studies to New Zealand and provides our general conclusions.

A full bibliography of the studies considered in this report is attached as an appendix. We have not discussed the methodology employed in the various studies in detail, except to the extent that it materially affects the interpretation of the results in the New Zealand context. Providing generalised price elasticities for telecommunications services is a difficult and imprecise exercise. The approach in this paper is to review relevant studies estimating the responses of telecommunications users to changes in the price of various fixed line and mobile telecommunication services. This report does not provide a comprehensive or exhaustive literature review. However, a key finding of our review is that the estimated price elasticities of demand for fixed line rental are consistently low, and lie within a relatively narrow range. The small, but non-zero, price elasticities of demand obtained in early studies have been confirmed in subsequent studies undertaken in different countries and time periods and appear to be declining over time. There are considerably fewer studies of price elasticity of demand for mobile services and more variation in the estimates obtained. The evidence suggests that mobile access and usage is more price elastic than fixed line access and usage. However, given the issues associated with estimating elasticities of demand for mobile services there is significantly more uncertainty about the impact of an increase in price on demand for these services.

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2.

Issues considered elasticity of demand

in

inferring

price

The price elasticity of demand for telecommunications services is generally established through the econometric estimation of the demand curve for the service as follows: ¾ a dependent variable is selected, which is a measure of the telecoms service in question. Examples of dependent variables used in the literature include numbers of telephones, penetration of telephones, revenue from specific call types, call duration, and call numbers. ¾ explanatory variables that describe demand are selected. These have included: •

a measure of price. Measures may include cost per minute, cost per call, connection charge, and the ongoing access fee; and,



demographic explanators, such as household income, composition of the household, proportion of urban to rural households etc.

This data is then assessed, generally in a cross section or over time. Regression or some other statistical analysis is used to determine whether the explanatory variables are statistically relevant and the extent to which changes in each explanatory variable is correlated with a change in the dependent variable. The selection of the dependent variable and explanatory variables is of critical importance to the validity of the model. Given the time available, it is beyond the scope of this study to review in detail the strengths and weaknesses of particular models. Where possible we have drawn on reviews of the literature to provide comfort that the included studies have been subjected to detailed critical assessment. The literature covers price elasticities of demand for: ¾ both business and residential consumers for the following fixed line services: •

connection to the network;



access through ongoing charges;



local use (either included in access, or charged separately);



long distance regional calls;

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international long distance calls; and



fixed to mobile calls,

¾ the following mobile services: •

mobile subscription and access;



mobile originated calls (generally includes mobile-to-fixed, off-net and on-net calls); and



mobile access and usage combined.

It appears that the majority of studies of mobile services reviewed in this report combine data from residential and businesses customers. Where the information was readily available, we have identified whether the study related to residential, business or both residential and business customers in the tables below. None of the studies of mobile services provided separate estimates of the price elasticity of demand for business customers only. Unfortunately, there are no published New Zealand studies on the price elasticities of demand for fixed line services, and only one New Zealand study of price elasticities of demand for mobile access and usage. As a result, reliance has been placed on North American, European and Australian studies. Where possible, we have tried to identify where this may create problems for drawing inferences about the New Zealand market.

2.1 Issues in estimating price elasticities of demand for mobile services An estimate of a price elasticity of demand is an estimate of a movement along the demand curve (i.e. the change in demand) in response to a change in price. Mobile telephone technology and associated services have been emerging and evolving over the period for which the studies reviewed in this report have been undertaken, with uptake of the new services also increasing over that time. The technology diffusion effects is reflected in (outward) shifts in the demand curve for mobile telephony services, increasing the difficulty of making an accurate estimation of movements along the demand curve in response to a change in price (i.e. estimating the price elasticity of demand). For example, demand for mobile subscription may have been growing over the period estimated due to factors associated with the uptake of new technology. Changes in demand may therefore reflect consumer responses to the new technology, as well as to changes in price. If prices have been falling over the same period the price elasticity of demand for mobile services may be:

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overestimated, if the technology diffusion effects on demand are not captured distinct from the price effects; or



underestimated if too much of the price effect is captured as a technology diffusion effect.

Other problems identified with studies of price elasticity of demand for mobile services include: •

Several of the studies have used relatively short time series, which may result in imprecise estimates.1 More accurate estimates of elasticities of demand will be obtained when using a long time series of data with sufficient variation around the explanatory and dependent variables.



Price elasticities indicate the expected change in demand for a small movement in price at a particular point in the demand curve. The value of price elasticities will vary at different points along the demand curve. This implies that if there is a substantial change in prices for mobile subscription, access, or usage, the price elasticities of demand may not be reliable predictors of the demand response at the new prices.



Significant changes in the nature of the service or the charging structure during the modelling period. For example, one study noted that the introduction of pre-payment options in the middle of the modelling period may have affected the estimated price elasticity of demand for mobile–originated calls.2



The own price elasticity of demand for mobiles services may be underestimated where historical data is used if the early subscribers to mobile phones had different characteristics to later and future subscribers. It could be expected that people subscribing later are more likely to be more price sensitive than those subscribing in the early years of the technology.

Therefore, the existing measures of price elasticity of demand for mobile telephone services are unlikely to be as reliable or consistent as those made in relation to the relatively more mature market for fixed line services. The key implication of this is that we have considerably less confidence about the effect on demand for mobile services (subscription, access or usage) of any change in price than we have about the effect of a change in price on demand for fixed line services. A change in the price of mobile services could,

1

This was a criticism made in Competition Commission (2003), p 212, and may be true of, for example the New Zealand study Danaher (2002).

2

Competition Commission (2003) p 209, referring to comments by Frontier Economics (London).

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for example, lead to a significantly larger (or smaller) reduction in demand than the range of price elasticities suggests.

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3.

Results of international studies

3.1 Summary In Table 1 we provide a summary of the ranges of the own-price price elasticity of demand for each type of service. The actual estimates of the price elasticities are provided in Section 3.3. An explanation of how to interpret the elasticity estimates is provided in Appendix 1. Table 1: Summary of results from studies reviewed * Range Fixed line connection charge

-0.02

-0.04

Fixed line monthly access charges 1

-0.02

-0.10

Local calls 2

-0.04

-0.11

-0.06

-0.54

-0.09

-0.80

Fixed to Mobile

-0.11

-0.80

Mobile access and usage (combined)

-0.41

-0.80

Long distance national

-0.10

-1.55

Long distance international

-0.30

-1.54

Mobile subscriptions/access 3 Mobile originated calls

*

4

Generally excludes outliers and non-comparable studies. 1

We have excluded the reviewed pre-1980 studies given the apparent trend in declining access price elasticities over time.

2

We have excluded the relatively high (although still inelastic) elasticity of –0.46 from Australia where local calls are separately priced. US based studies, in which local calls are free are likely to be more relevant to NZ, and result in a generally lower price elasticity of demand.

3

Two studies excluded as potential outliers – Ahn and Lee (1999) and Okada and Hatta (1999), which estimate the price elasticity demand for mobile subscription as being –6.10, and –3.36 respectively. The Ahn and Lee (1999) estimate was not statistically different from zero.

4

One study excluded as potential outlier - Ahn and Lee (1999) estimated a price elasticity of demand of –30.62 for mobile originated calls.

The ranges of elasticities in Table 1 reflect combined residential and business elasticity measures (with the exception of connection services which relates to residential customers only). In Table 3 to Table 12 below we provide the

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elasticity estimates from the individual studies reviewed and identify, where possible, whether the study related to residential, business or business and residential demand combined. Given the level of detail we have been able to ascertain regarding the studies in the time available, we have been able to obtain separate range estimates of elasticities for residential and business customers only in relation to fixed line access services. For fixed line connection charges, all of the studies reviewed related to residential customers only. For fixed line monthly access charges, the price elasticity of demand ranges are as follows: •

Residential: -0.02 to –0.10;



Business: 0.00 to - 0.01.

The elasticity estimates for fixed line services shown in Table 1 are generally consistent with subjective attempts to provide general indications of price elasticities provided in Table 2 below.

3.2 Assumed levels Table 2 provides price elasticity of demand estimates for fixed line services as used by the World Bank in its in its Telecommunications Regulatory Handbook (2000). The World Bank developed these estimates on the basis of Taylor’s reviews of studies (1980, 1994) and other studies. A number of the studies referred to by the World Bank are included in our review and therefore inform the ranges included in Table 1. Table 2: Elasticity assumptions from other sources Type of demand Access

Connection

Subscription

-0.03 (± 0.01)

-0.10 (± 0.09)

Local calls

Long distance

-0.20 (± 0.05)

Domestic long distance Shorter distance

-0.375 (± 0.125)

Medium distance

-0.65 (± 0.15)

Longer distance

0.75 (± 0.20)

International Calls

-0.9 (± 0.30)

3.3 International studies The details of the international studies for each of the fixed line and mobile telecommunication services considered are provided in Table 3 to Table 12:

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Table 3: Price elasticity of demand for (one off) service connection charges;



Table 4: Price elasticity of demand for fixed line access;



Table 5: Price elasticity of demand for fixed line local calls;



Table 6: Price elasticity of demand for long distance (national) calls;



Table 7: Price elasticity of demand for long distance (international) calls;



Table 8: Price elasticity of demand for fixed–to–mobile calls;



Table 9: Price elasticity of demand for mobile subscription/access;



Table 10: Price elasticity of demand for mobile originated calls;



Table 11: Price elasticity of demand for mobile services (price variable defined as access charge and usage charges); and



Table 12: Cross price elasticities of demand – mobile services.

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Cain and MacDonald (1991) as reported in Industry Commission (1997)

Perl 1978 - as reported in Taylor (1980)

Waverman 1974 as reported in Taylor (1980)

US

US

US

R

R

-0.02

-0.04

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Telephones as dependent variable. Note that the price elasticity for connection charges is less elastic than for fixed ongoing access described in Table 4.

Telephones as dependent variable. Note that the price elasticity for connection charges is less elastic than for fixed ongoing access described in Table 4.

Penetration rates of 95 percent. Less elastic results would be expected for higher penetration rates.

-0.038

R

Comment

Price elasticity

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Study

Country

Table 3: Price elasticity of demand for (one off) service connection charges

Holden Pearmain (2002) – as reported in Competition Commission (2003)

Evans (1996) - as reported in Industry Commission (1997)

Madden, Bloch and Hensher (1993) - as reported in Industry Commission (1997)

Perl (1984) - as reported in Industry Commission (1997)

Taylor and Kridel (1990) - as reported

UK

NZ

AUST

USA

USA

Studied residential telephone subscription rates and prices from 1986 to 1995. In this time residential access increased by 81% (in nominal terms) and a bundle of call and access charges for residential and business customers fell by 50% in real terms. Found substantial increase in prices had little impact on penetration rates, even among lowest income households. Concludes that households base decision to access telephone services on the price of a bundle of services that access provides, rather than price of access alone. Examination of response to changes in rate structures. Includes access charge through the household income variable (which presupposes that access will occur) – makes this study difficult to compare to the US/Canadian studies outlined below.

n.a.

-0.003

R

-0.016 to –0.049 R

R

-0.038 to -0.114

-0.037

R

-0.065 to -0.196

Estimated that doubling access charges across the 5 states they examined

Similar approach to Perl (1984) – extended to account for income distribution.

10

Where penetration rates were 97 per cent, with access prices tripling across the range.

Where penetration rates were 93 per cent, with access prices tripling across the range.

Where penetration rates were 88 per cent, with access prices tripling across the range.

Holden Pearmain Research conducted a (conjoint) survey of 1,570 people in which respondents were asked to choose between different service offerings. It used statistical modelling to determine the relative importance of each product or service area and estimate the associated own and cross price elasticities.

-0.05

R

Comment

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for fixed line access

Table 4: Price elasticity of demand for fixed line access

Bodnar, Dilworth and Iacono (1988) - as reported in Industry Commission (1997)

Industry Commission (1997)

Access Economics (1998)

Alleman 1977 - as reported in Taylor (1980)

Feldmen 1976 - as reported in Taylor (1980)

Canada

AUST

AUST

US

US

R

R

-0.048

-0.009

R

-0.05

11

Telephones plus extensions as the dependent variable. Access and use are charged together. Taylor expressed reservations about the validity of the results due to a flaw in the model specification.

Telephones as the dependent variable. Access and use are charged together.

R

-0.17

Based on the studies outlined above, this was used as an average value in price rebalancing analysis for Telstra (p. 158).

Range of elasticities across different provinces within Canada.

Based on the Industry Commission (1997) report assumptions and review of elasticity studies. Access Economics assume a price elasticity of demand of – 0.04 for residential customers and –0.01 for business customers (a small increment to the Industry Commission’s assumed value of 0 for business customers). The shares of total fixed access lines is used to form the weighted average.

B

0.00

R

For Canada as a whole.

Penetration rates of 95 percent. Less elastic results would be expected for higher penetration rates.

In respect of changes in a measured rate.

In respect of changes in a flat rate.

would have reduced penetration from 92.5% to 88.8%.

Comment

-0.03 B&R

R

-0.04

–0.030 to –0.005

R

-0.096

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Cain and MacDonald (1991) - as reported in Industry Commission (1997)

in Industry Commission (1997)

Study

USA

Country

Price elasticity of demand for fixed line access

Perl 1978 - as reported in Taylor (1980)

Rash 1971 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

Davis et al 1973 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

NYT (1976a) – as reported in Taylor (1980)

US

Canada

Canada

Canada

US

Sweden

US New York

R

R

B

-0.11

-0.12

- 0.09

-0.1

R

-0.14

R

For basic and terminal equipment. Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

12

Telephones as the dependent variable. Access and use are charged together.

-0.06 B&R

Short run

Total telephones less residence telephones as the dependent variable. Access and use are charged together.

Telephones as the dependent variable. Access and use are charged together.

Telephones as the dependent variable. Access and use are charged together.

-0.08 B&R

Long run

Telephones in the household or nearby as the dependent variable. Access and use are charged together.

R

-0.08

Telephones as the dependent variable. Access and use are charged together.

Comment

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for fixed line access

NYT (1976a) – as reported in Taylor (1980)

SNET 1977a – as reported in Taylor (1980)

Davies et al – as reported in Taylor (1980)

Dobell et al – as reported in Taylor (1980)

NYT 1976 b – as reported in Taylor (1980)

NYT 1976 b – reported in Taylor (1980)

Waverman – as reported in Taylor (1980)

US New York

US Connecticut

US Bell system

Canada

US (New York)

US (New York)

Sweden

B&R

B&R

B&R

B&R

B&R

-0.21

-0.20

-0.03

-0.17

-0.27

-0.38

NA

-0.17

-0.7

-0.27

B&R

B&R

B&R

B&R

R

13

Number of pulses (as a measure of the length of call ) is used as the dependent variable. This therefore focuses more directly on demand for local use (as against access) and demonstrates a higher elasticity for use than access generally, which Taylor argues is to be expected.

Additional calls as the dependent variable. Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access. Taylor questions the validity of the 0.7 figure as being out of line with other related results.

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

R

-0.02

-0.021

Additional calls as the dependent variable. Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

R

-0.35

NA

Comment

Price elasticity

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Study

Country

Price elasticity of demand for fixed line access

SNET 1977 a – as reported in Taylor (1980)

NYT 1976a – as reported in Taylor (1980)

NYT 1976a – as reported in Taylor (1980)

US (Connecticut)

US (New York)

US (New York)

B NA

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Number of calls as the dependent variable. Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

-0.18

B

B

-0.08

-0.15

Price deflated revenue is used as the dependent variable, and given access and use charges are integrated, Taylor considers these estimates can be interpreted as primarily for a demand for access.

B

B

-0.03

-0.07

Comment

Price elasticity

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Study

Country

Price elasticity of demand for fixed line access

Madden, Bloch and Hensher (1993) - as reported in Industry Commission (1997)

Park, Wetzel and Mitchell (1983) - as reported in Industry Commission (1997)

Bidwell, Wang and Zona (1995) - as reported in Industry Commission (1997)

Trotter (1996) - as reported in Industry Commission (1997)

Industry

AUST

USA

USA

UK

AUST

Difference between pricing structures between Australia and NZ mean that Australian customers are likely to be more price sensitive to local calls. Australian customers pay for each local call whereas NZ customers pay a monthly charge and local calls are free (as is more common in the US).

-0.46

Number of calls with respect to per minute charge. Call minutes with respect to per-call charge. Call minutes with respect to per minute charge.

-0.06 -0.09 -0.11

Used a very basic model specification – dependent variable is the number of local calls and a single explanatory variable, the price per call. When other explanatory variables were included, the absolute value of the price elasticity was lower. Based on the studies outlined above, the Commission used this as an average

-0.04

-0.06

15

Number of calls with respect to price per call.

-0.04

Studied impact on local calls of mandatory switch from a flat rate to a measured rate service. This study significant for Australia (where there is a measured rate service in terms of number of calls) – but not so significant for NZ where have a flat rate service.

Number of calls with respect to per call charge.

-0.08

This may explain the significant difference between the elasticity estimate in this study and the US studies outlined below.

Comment

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for fixed line local calls

Table 5: Price elasticity of demand for fixed line local calls

Access Economics (1998)

Commission (1997)

Study

B&R R B

-0.06 -0.08 -0.04

Price elasticity

Weighted average of –0.06 based on shares of total call revenues and is consistent with the average value used by the Industry Commission (1997).

Value for residential customers based on estimate in Albon (1988) and the econometric literature summarised in Taylor (1980). Similarly, the estimate for business customers was based on the literature reviewed in Taylor (1980).

The NZ tariff structure, however, is more comparable to the US.

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However, the average value used by the Commission still seems more in line with the range in the US studies than the estimate in the only Australian study.

The Commission noted that it would be “misleading” to apply the local call price elasticity of demand estimates from the US studies directly to Australia due to the difference in the tariff structure between the US and Australia. The US studies reflect a flat monthly fee with unlimited local calls. In Australia customers pay a fee for each local call. The Industry Commission indicate that the difference in tariff structure means that demand for local calls by Australian customers are likely to be more sensitive to changes in the call charge.

value in price rebalancing analysis for Telstra (p. 158).

Comment

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

AUST

Country

Price elasticity of demand for fixed line local calls

Madden, Bloch and Hensher (1993) - as reported in Industry Commission (1997)

Bureau of Transport and Communications Economics (1991) as reported in Industry Commission (1997)

Duncan and Perry (1994) - as reported in Industry Commission (1997)

Gatto, Lagin-Hooper, Robinson, Tyan (1988) - reported in Industry Commission (1997)

Taylor (1980) - as reported in Industry

AUST

AUST

USA

USA

USA

For medium distance calls (day calls for 30-100Km). For long distance (economy calls over 800Km)

-0.53 -1.01

IntraLATA revenue and minutes of use used as dependent variables.

-0.38

For interstate call minutes. Review of telecommunications demand literature.

-0.75

17

Minutes of access used as the dependent variable. This study relates to long distance, inter-state calls.

-0.72

Therefore, this study reflects long distance, but not inter-state calls.

IntraLATA calls travel beyond the local area but within a Local Access Transport Area (LATA). Long distance calls in the US are based on LATAs. LATAs are within-state geographical areas consisting of a single population centre.

Number of domestic long distance calls as the dependent variable.

-0.93

None of the own-price elasticity estimates were found to be statistically significant.

Comment

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for long distance (national) calls

Table 6: Price elasticity of demand for long distance (national) calls

Train (1993) - as reported in Industry Commission (1997)

Appelbe, Snihur, Dineen, Farnes and Giordano (1988) - as reported in Industry Commission (1997)

Industry Commission (1997)

Access Economics

USA

Canada

AUST

AUST

For intraLATA minutes For number of intraLATA calls. Study related to residential demand. Estimates made for two tariff options: (1) unlimited local calls, usage charges for intraLATA calls; (2) unlimited calls in both categories with a higher monthly fixed charge. The elasticity estimates shown relate to option (1), which is applicable to the tariff design in NZ.

-0.42 R -0.34 R -0.40 R

Full rate long distance minutes. Discount short distance minutes. Discount long distance minutes.

-0.48 -0.39 -0.49

Based on the studies outlined above, the Commission used this as an average value in price rebalancing analysis for Telstra (p. 158). Estimates for both residential and business customers based on Albon

-0.60 -0.55 B&R

18

Modelled uni-directional and bi-directional price elasticities. The elasticities shown at left are uni-directional.

Full rate short distance minutes.

-0.21

Train also reviewed a number other US studies and concluded that residential elasticity for the intraLATA toll was around –0.40.

For number of intraLATA calls (i.e. long distance but not inter-state calls). Article does not provide explanation for higher estimates compared to other studies.

Comment

-1.05 to -1.55

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Martines-Filho and Mayo (1993) - as reported in Industry Commission (1997)

Commission (1997)

Study

USA

Country

Price elasticity of demand for long distance (national) calls

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

State A2

State A3

State B1

State C1

State D1

State E1

State E2

State E3

State E4

State E5

-0.60 -0.14 -0.45 -0.85 -0.73 -1.04 -1.04 -0.81

-0.07 -0.35 -0.03 -0.21 -0.17 -0.26 -0.13

-0.22

-0.32

-0.12

-0.15

-0.16

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Taylor (1980)

Long run

B

-0.33

Short run

(1988).

R

-0.78

(1998)

Modelled from US intrastate calls data, characterised as medium distance, and considering a period of up to 10 years.

19

Weighted average of –0.55 based on shares of total call revenues and is consistent with the average value used by the Industry Commission (1997), although slightly lower.

Comment

Price elasticity

Study

State A1

US states 1976 - 1978

Country

Price elasticity of demand for long distance (national) calls

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

Taylor (1980)

State F1

State G1

State H1

State I1

State I2

State I3

State I4

State J1

State K1

State L1

State L2

State M1

State M2

State N1

State N2

State N3

-0.96

-0.35

-0.79

-0.86

-0.24 -0.15

-0.82

-0.14

-0.69

-0.12 -0.83

-0.43

-0.23

-0.17

-0.39

-0.91

-0.21 -0.20

-0.23

-0.14

-0.59

-0.64

-0.29

-0.50

-0.37 -0.84

-0.56

-0.16

-0.44

-0.62

-0.14

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Comment

Price elasticity of demand for long distance (national) calls

20

NA

NA

Taylor (1980)

Taylor (1980)

Dobell et al 1972 - as reported in Taylor (1980)

Khadem - as reported in Taylor (1980)

Larsen and McLeary 1970 - as reported in Taylor (1980)

Rash 1972 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

State R1

State Q1

Canada Ontario and Quebec

Canada Trans Canada

US States

Canada Ontario and Quebec

Canada Ontario and Quebec

R

R R

R

R

-2.58 -1.01

-0.94

-1.16

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

NA

-0.28

-1.9

-0.3

R

Long run

Short run R

-0.37

-0.31

-0.21

-0.84

-0.07

Taylor (1980)

State O1

-0.91

-0.13

Taylor (1980)

State N4

Price elasticity

Study

Country

Price deflated revenue/ number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Price deflated revenue is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Number of calls is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Price deflated revenue is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Price deflated revenue is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

21

Long distance calls characterised as longer distance than the intrastate studies above

Comment

Price elasticity of demand for long distance (national) calls

Canada Ontario and Quebec

-2.57

B&R

-1.03

B&R

-0.4 to –0.5 B&R

B

B

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

-0.11 B&R

Belgium

Dobell et al 1972 - as reported in Taylor (1980)

Davis et al 1974 - as reported in Taylor (1980)

US Bell system

B&R

AT&T

US Bell system

-1.35

B

-1.20

-0.24

Waverman 1974 - as reported in Taylor (1980)

Canada Ontario and Quebec

R

-0.98

-0.29

NA

Deschamps 1974 - as reported in Taylor (1980)

Larsen and McCleary 1970 - as reported in Taylor (1980)

US States

B&R

Wert 1976 - as reported in Taylor (1980)

US Bell

Price elasticity

-0.88

Study

Country

Price deflated revenue is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

22

Calls is the dependent variable. Taylor states that a dynamic model of the data (in a manner comparable with the other studies) would deliver a higher long run elasticity.

Price deflated revenue/ number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Calls is the dependent variable. Differing demand responses to different tariff structures are therefore not captured. Furthermore, Taylor calls into question the validity of the results as they are based to some extent on subjective judgements.

Price deflated revenue/ number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Calls is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Percent of daytime calls is the dependent variable.

Comment

Price elasticity of demand for long distance (national) calls

-1.12

-0.72

-1.08

-0.58

-0.72 B&R -0.41 B&R -0.51 B&R -0.29 B&R

Waverman 1974 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

Waverman 1974 - as reported in Taylor (1980)

Great Britain

Great Britain

Sweden

Sweden

Calls / number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Length of call (pulses) / number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Calls / number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Price deflated revenue/ number of phones is the dependent variable. Differing demand responses to different tariff structures are therefore not captured.

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

B&R

B&R

B&R

B&R

Calls is the dependent variable.

-2.71

-1.70 B&R

Kwok, Lee and Pearce 1975 - as reported in Taylor (1980)

Canada Trans Canada

B&R

Calls is the dependent variable. Taylor suggests these results are questionable.

-0.41

-0.18 B&R

Kwok, Lee and Pearce 1975 - as reported in Taylor (1980)

Canada Ontario and Quebec

B&R

Comment

Price elasticity

Study

Country

Price elasticity of demand for long distance (national) calls

23

Bewley and Fiebig (1988) - as reported in Industry Commission (1997)

Bureau of Transport and Communications Economics (1991) as reported in Industry Commission (1997)

Acton and Vogelsang (1992) - as reported in Industry Commission (1997)

Hackl and Westlund (1996) - as reported in Industry Commission (1997)

Appelbe, Snihur, Dineen, Farnes and

AUST

AUST

USA

Sweden

Canada

For long-run long-haul minutes, with respect to price per minute

-1.54

For thousands of minutes from Sweden to UK, with respect to price per minute For thousands of minutes from Sweden to US, with respect to price per minute

-1.38 -2.05

For full-rate short-haul billed minutes, with respect to price per minute

24

For thousands of minutes from Sweden to Germany, with respect to price per minute

-0.07

-0.43

For number of call minutes terminating in the US, with respect to price per minute to the US

-0.49

The IC reports that estimates suggested price elasticity of demand for international calls out of Sweden increased from 1976-1990

For number of call minutes originating in the US, with respect to price per minute from the US

Number of calls, with respect to call charge.

-0.36

-1.01

For long-run long-haul number of calls, with respect to price per minute

-0.37 Timing is more price sensitive than number of calls

Comment

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for long distance (international) calls

Table 7: Price elasticity of demand for long distance (international) calls

Craver 1976 c - as reported in Taylor (1980)

Craver 1977 - as reported in Taylor (1980)

Craver 1976 d - as reported in Taylor (1980)

Craver 1976 d - as reported in Taylor (1980)

Craver 1976 a - as reported in Taylor

US/UK

US

US

US/UK

US/Canada

-0.62

-0.23

Total calls.

-0.46

Calls 2 way US to Canada.

Calls from UK to US.

Calls from US

-0.51

-1.02

Billed minutes US to UK.

25

Based on Bewley and Fiebig (1988) – estimated that elasticity of demand for an international call minute with respect to the price per minute is –1.2 (in the short run) and –1.5 (in the long run) – using data from 1978 to 1983. Industry Commission indicate that as international call prices have fallen substantially since 1983 these estimates are too high and therefore use the lower estimate of –1.2

-0.38

Long run

-0.63

Short run

-1.20

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Industry Commission (1997)

For discount-rate short-haul billed minutes, with respect to price per minute

-0.53

Giordano (1988) - as reported in Industry Commission (1997)

This indicates discounted calls are more elastic, possibly due to business using full rate services

Comment

Price elasticity

Study

AUST

Country

Price elasticity of demand for long distance (international) calls

Craver 1976 a - as reported in Taylor (1980)

Craver 1976 a - as reported in Taylor (1980)

Khadem 1976 - as reported in Taylor (1980)

US/Canada

Canada

Canada -1.67 -1.12

-0.61 -0.3

Deflated revenues, Canada to US. Differences in pricing structures will not be fully captured.

Deflated average revenue per message. Canada to US.

Outward calls from Canada.

Calls Canada to US

-0.55

-3.65

Calls US to Canada.

Calls 2 way US to Canada (Quarterly, not annual data as above).

Comment

-0.07

-0.52

-0.89

-0.42

Price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Craver 1976 a - as reported in Taylor (1980)

(1980)

Study

US/Canada

Country

Price elasticity of demand for long distance (international) calls

26

DotEcon (2002) – as reported in Competition Commission (2003)

Frontier Economics (London) (2002) – as reported in Competition Commission (2003)

Holden Pearmain (2002) – as reported in Competition Commission (2003)

Access Economics (1998)

UK

UK

UK

Australia

Studied own and cross price elasticities of demand for fixed-to-mobile, mobile subscription, and mobile originated calls. Fixed-to-mobile elasticity is based on monthly data from January 1997 – February 2001. Data on call minutes, tariffs, and total handsets for each mobile network operators is from BT.

Studied own and cross price elasticities of demand for fixed-to-mobile, mobile subscription, and mobile originated calls, using quarterly data for all mobile network operators for the period between 1994 - 2001.

Holden Pearmain Research conducted a (conjoint) survey of 1,570 people in which respondents were asked to choose between different service offerings. It used statistical modelling to determine the relative importance of each product or service area and estimate the associated own and cross price elasticities. Weighted average of STD elasticities, based on shares of total Near and Far distance categories.

-0.43

-0.18

-0.11

-0.8

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

27

Comment

Price elasticity

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Study

Country

Table 8: Price elasticity of demand for fixed–to–mobile calls

DotEcon (2002) – as reported in Competition Commission (2003)

Frontier Economics (London) (2002) – as reported in Competition Commission (2003)

Holden Pearmain (2002) – as reported in Competition Commission (2003)

Rohlfs - as reported in Competition Commission (2003)

CRA - as reported in Competition

UK

UK

UK

UK

UK

Used by Rohlfs to calculate termination charges for Oftel.

Used by CRA to estimate termination charges for the purpose of a submission to the UK Competition Commission.

-0.30

-0.45

28

Study used conjoint analysis approach – where survey respondents are asked to choose between different service offerings. A sample size of 1570 was used. Artificiality of responses to the survey could introduce measurement error into the elasticity estimates.

Used by Frontier Economics to estimate termination charges for the purpose of a submission to the UK Competition Commission. Used a different elasticity assumption to the estimation above to be consistent with evidence regarding the size of externalities.

Estimated market mobile subscription charge using quarterly data from all four mobile network operators between 1994 - 2001 (28 observations). Estimates are based on the minimum monthly mobile subscription charge that could be paid, assuming no outgoing calls were made (this reflected the package offered by each network excluding any bundled minutes).

-0.08

-0.30

-0.54

-0.40

Estimated by DotEcon using quarterly data from January 1996 to September 2001 (23 observations). Separate data on mobile subscription revenue and mobile call revenues were not available. DotEcon used information on average subscription revenue per customer to determine price.

-0.37

Used by DotEcon to estimate the appropriate termination charges for the purpose the submission to the UK Competition Commission.

Issues affecting applicability to NZ

Own price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for mobile subscription/access

Table 9: Price elasticity of demand for mobile subscription/access

Access price = 10, usage price = 0.1 Access price = 15, usage price = 0.15 Access price = 25, usage price = 0.3

-3.36

-0.06 -0.10 -0.20

Okada and Hatta (1999)

Danaher, P. (2002)

Japan

NZ

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

29

Estimated using data from 1992 - 1996. Okada and Hatta note that mobile telecommunications technology was diffusing rapidly during this period, and the estimate may contain some upward bias.

-6.1 (monthly charge)

Data was obtained from International Telecommunication Union’s World Telecommunication Development Report 1998).

The estimate of elasticity of demand for connection is so imprecise that it is regarded as not statistically significant. GDP per capita was a stronger descriptor of subscription demand than access price. No explanation or comment is made about the size of the estimated price elasticity of demand for monthly access.

-0.25 (connection fee – not statistically significant)

Ahn and Lee (1999)

64 countries with relatively high per capita GDPs (includes AUS but not NZ)

USA

Estimated using quarterly data from January 2000 - December 2001 for 294 urban areas in the US.

Competition Commission (2003)

UK -0.43 R

Issues affecting applicability to NZ

Rodini, Ward and Woroch (2002)

Own price elasticity

Assumed by the UK Competition Commission in analysing the effect of a price cap on termination charges (p. 276)

Commission (2003)

Study

-0.30

Country

Price elasticity of demand for mobile subscription/access

Tishler, Ventura and Watters (2001)

Israel -0.42 (monthly charge)

-0.22 (purchase price of phone)

Access price = 35, usage price = 0.6

-0.35

Phone purchases as the dependent variable.

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

30

Study was based on a field experiment of 296 residential customers over 13 months (Oct 1994 – Oct 1995). The sample was separated into four groups who had not previously owned a mobile phone. The four groups each faced different initial access and usage prices, and were all subject to price increases over the 13 month period. The study could possibly be regarded as estimating the price elasticity of demand of consumers at different points on the demand curve.

Issues affecting applicability to NZ

Own price elasticity

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Study

Country

Price elasticity of demand for mobile subscription/access

DotEcon (2002) – as reported in Competition Commission (2003)

Holden Pearmain (2002) – as reported in Competition Commission (2003)

Hausman– as reported in Competition Commission (2003)

Frontier Economics (London) - as reported in Competition Commission (2003)

Rohlfs - as reported in Competition

UK

UK

USA

UK

UK

31

Used by Frontier Economics to estimate termination charges for the purpose of a submission to the UK Competition Commission. Frontier Economics’ estimate of own price elasticity of demand for mobile calls was not statistically significant. Frontier Economics thought this could be due to 1) the practice of charging customers a fixed monthly fee that includes a number of call minutes, or 2) the introduction of pre-pay in the middle of the modelling period.

-0.53

Used by Rohlfs to calculate termination charges.

Study relates to mobile-originated calls. This range is reported in the UK Competition Commission (2003) p 216.

-0.5 to –0.6

-0.30

Study relates to mobile-originated calls (which encompasses mobile-to-fixed, onand off-net calls).

-0.48

Used by DotEcon to calculate termination charges –– difference to number above due to rounding.

Study relates to mobile-originated calls (which encompasses mobile-to-fixed, onand off-net calls). Estimated an average price of mobile calls for each supplier, and combined these into a single weighted average using the share of total call minutes as the weights.

-0.62

-0.65

Issues affecting applicability to NZ

Own price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Price elasticity of demand for mobile originated calls

Table 10: Price elasticity of demand for mobile originated calls

Access price = 10, usage price = 0.1 Access price = 15, usage price = 0.15 Access price = 25, usage price = 0.3 Access price = 35, usage price = 0.6

-0.09 -0.14 -0.31 -0.71

Danaher, P. (2002)

Tishler, Ventura and

NZ

Israel

Phone purchases as the dependent variable with respect to cost per minute of

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

-0.8

The estimate of elasticity of demand for mobile originated calls is so imprecise that it is regarded as not statistically significant. No comment is made about the large size of the elasticity estimated. GDP per capita was a stronger descriptor of subscription demand thanprice. Data was obtained from International Telecommunication Union’s World Telecommunication Development Report 1998).

-30.62

Ahn and Lee (1999)

64 countries with relatively high per capita GDPs (includes AUS but not NZ)

32

Study was based on a field experiment of 296 residential customers over 13 months (Oct 1994 – Oct 1995). The sample was separated into four groups who had not previously owned a mobile phone. The four groups each faced different initial access and usage prices, and were all subject to price increases over the 13 month period. The study could possibly be regarded as estimating the price elasticity of demand of consumers at different points on the demand curve.

Explanatory variable is mobile usage. Dependent variable is minutes and other explanatory variables are real price, real GDP and number of subscribers.

UK

-0.5 approx

Rodini, Ward and Woroch (2002)

USA

Dineen, C, Teligen Ltd

Competition Commission (2003)

UK

Explanatory variable is mobile usage. Estimated using quarterly data from January 2000 - December 2001 for 294 urban areas in the US.

Issues affecting applicability to NZ

-0.17 R

Own price elasticity

Assumed by the UK Competition Commission in analysing the effect of a price cap on termination charges (p. 276)

Commission (2003)

Study

-0.30

Country

Price elasticity of demand for mobile originated calls

Watters (2001)

Study

Own price elasticity airtime.

Issues affecting applicability to NZ

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Country

Price elasticity of demand for mobile originated calls

33

Rodini, Ward and Woroch (2002)

Access Economics (1998)

J Hausman (1997)

J Hausman (2000)

USA

Australia

USA

USA

Falls in range of other studies Appears to be combined elasticity measure for access and usage, but is unclear from the Access Economics report. Data used for study was 1983-93 data for thirty areas in the US. The price variable is based on monthly access charge and per minute usage charges for 160 minutes per month (approximate average usage) for the least expensive plan available in each area. A variable relating to each year was included to allow for the “diffusion effect” (i.e. shifts in the demand curve over time as the up take of mobile telephony services increased). The range in estimates arises from the two different estimation techniques used (least squares and instrumental variables). Little information given about basis for the estimate. Appears to be a re-estimate of Hausman (1997) based on more recent data.

-0.60 R (2000) -0.8 -0.41 to –0.51

-0.71

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

34

Issues affecting applicability to NZ

Own price elasticity

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Study

Country

Table 11: Price elasticity of demand for mobile services (price variable defined as access charge and usage charges)

Rodini, Ward and Woroch (2002)

DotEcon (2002) – as reported in Competition Commission (2003)

Frontier Economics (London) (2002) – as reported in Competition Commission (2003)

Holden Pearmain (2002) – as reported in Competition Commission (2003)

Rohlfs - as reported in Competition Commission (2003)

Competition Commission (2003)

USA

UK

UK

UK

UK

UK

Cross-price elasticity of mobile originated calls with respect to the price of subscription

-0.25 to –0.28

-0.13

-0.10

-0.13

-0.13

-0.26

-0.27 to -0.50

-0.48 to –0.50

35

Assumed by the Competition Commission in analysing the effect of a price cap on termination charges (p. 276)

Cross-price elasticity of mobile subscription with respect to the price of mobile originated calls

Cross-price elasticity of mobile originated calls with respect to the price of subscription

Cross-price elasticity of mobile subscription with respect to the price of mobile originated calls

Cross-price elasticity of mobile originated calls with respect to the price of subscription

Cross-price elasticity of mobile subscription with respect to the price of mobile originated calls

Cross-price elasticity of mobile originated calls with respect to the price of subscription

Cross-price elasticity of mobile subscription with respect to the price of mobile originated calls

Cross-price elasticity of mobile demand with respect to the price of fixed line access – all else held constant, customers are more likely to subscribe to mobile services in areas with relatively higher fixed-line rates and/or relatively lower mobile rates.

-0.18 R (2000) -0.13 R (2001)

Issues affecting applicability to NZ

Cross price elasticity

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

Study

Country

Cross price elasticities of demand

Table 12: Cross price elasticities of demand

Study

-0.198

-0.108

Cross price elasticity

Cross-price elasticity of mobile subscription with respect to the price of mobile originated calls

Cross-price elasticity of mobile originated calls with respect to the price of subscription

Issues affecting applicability to NZ

Review of price elasticities of demand of fixed line and mobile telecommunications services August 2003

R= Residential, B = Business, B&R = Business and Residential (where a distinction is made in the study)

Country

Cross price elasticities of demand

36

4

Factors relevant to New Zealand and conclusions

Making comparisons between price elasticity studies, and drawing general conclusions from them, is a difficult task given: •

differences across sample sets, for example, in the underlying demographics of consumers;



differences between model specifications, where some may use different explanatory variables that are left out by others, or use a different functional form to characterise demand;



changes over time in the nature of the product being examined and available substitutes. This may lead to shifts of the demand curve rather than movements along the demand curve. This is not expected to be a substantive problem for fixed line services, but as discussed in Section 2.1 is an issue for mobile services; and,



high levels of aggregation of consumer groups, where results are averaged across whole countries or large regions of countries.

It is even more difficult to then apply those studies to New Zealand given the potential for divergences in telecoms services, pricing and consumer behaviour in New Zealand from that observed and modelled elsewhere. Notwithstanding this, there is a relatively high level of consistency in the price elasticity of results for fixed line services across the studies and regions included in this review. This provides some level of confidence that the orders of magnitude and relativities of the different elasticities for fixed line services measured are likely to be of some relevance to the New Zealand experience. In particular: •

fixed line connection (once off) to the network has the lowest price elasticity of the telecoms services measured;



ongoing fixed line access has a non-zero, but low price elasticity for residential users. The price elasticity of demand for ongoing access (line rental) appears to have declined over time. Taylor’s seminal review in 1980 led him to propose a range of –0.01 to –0.19 (average of –0.1). Studies from after this time included in this review only range to -0.096;



ongoing fixed line access is arguably at or very close to 0 for business users. As outlined by the Industry Commission (1997), Taylor (1994) has argued that access versus no access is not a meaningful consideration for assessing business demand, as businesses without telephones have almost certainly made that 37

August 2003

choice on non-economic grounds. A price elasticity of 0 for business customer access was considered reasonable by the Industry Commission in relation Telstra’s price rebalancing in 199596; •

the numbers of fixed line tolled calls is less price elastic than the length of tolled calls indicating a higher propensity to minimise the length of calls than to go reduce the number of calls in the face of a price increase;



price elasticity tends to increase with the distance of the calls;



longer term (multi period) elasticities are generally more elastic than short term elasticities, although short to medium distance calls tend to remain inelastic in the longer term.

Specific considerations in bringing the results to bear in NZ are that: •

Studies of price elasticity for fixed line local calls where local calls are included in the access charge are most relevant. These include US studies. Studies of areas where local calls are charged in addition to access will tend to produce higher elasticities of demand for local calls.



The Industry Commission has indicated that US studies are likely to underestimate the elasticity of demand for international calls from Australia – as a larger proportion of international calls are by residential customers in Australia than in the US – and residential demand for international calls is more sensitive to price changes than business demand. To the extent NZ has the same pattern of calls as Australia relative to the US, this will also be the case in NZ.



Although outside the scope of this review, income elasticities (the propensity to change consumption with a change in income) also impact on the demand for services. In a number of studies it was noted that income effects outweighed price effects – for example, level of income was more likely to describe whether a household was connected than the price of the connection.

As outlined in Section 2, there are a significant number of potential problems with the estimation of price elasticities of demand for mobile services. Estimates are not considered as reliable or consistent as estimates of price elasticities of demand for fixed line services. Notwithstanding this, estimates of the price elasticity of demand for access to mobile services appear to be higher and lie within a wider range than price elasticity of demand for fixed line access and local calls. Estimates of own price elasticities for: •

fixed line connection fall within the range of –0.02 to –0.04; 38

August 2003



fixed line access fall within the range of –0.02 to –0.1; and



demand for mobile access services are within the range of –0.6 to 0.54, meaning that the estimates vary by a factor of nine.

In addition, no distinction is made in mobile studies to allow direct comparisons between price elasticities of demand for particular call types. We are therefore unable to draw conclusions about the relative price elasticities of, for example, long distance calls from fixed relative to mobile services. As a result we have less confidence in estimating the effect on demand for mobile services (subscription, access or usage) of any change in price. A change in price could, for example, lead to a significantly greater (lower) reduction in demand for mobile services than the range of price elasticities suggests.

39 August 2003

Appendix 1: Interpreting price elasticity of demand estimates An increase in the price of a telecommunications service (such as fixed line long distance calls) will most likely reduce consumption of that service. The own price elasticity of demand measures the percentage decrease in demand resulting from a one per cent increase in the price of the service. If the own price elasticity of demand for a service is -0.5 say, then a one per cent increase in the price will reduce demand by 0.5 per cent below the level it would otherwise have been. As the price elasticity is greater than minus one in this case, the demand is described as price inelastic (see Box 1). If the own price elasticity of demand is -1.5 say, then a one per cent increase in the price will reduce demand by 1.5 per cent below the level it would otherwise have been. As the price elasticity is less than minus one in this case, the demand is described as price elastic (see Box 1). The price elasticity of demand estimates provided in this report are estimates of the own price elasticity of the demand for fixed line and mobile telecommunications services. However, reference is also made to studies that have estimated cross price elasticities. Box 1 below explains own price and cross price elasticity estimates.

40 August 2003

Box 1: Price Elasticity of Demand The price elasticity of demand measures the percentage change in the demand for a product resulting from a one per cent change in the price of the product (or another product). There are two types of demand elasticities, the own price elasticity of demand and the cross price elasticity of demand. Own price elasticity of demand for fixed line access The own price elasticity of demand for access measures the responsiveness of the demand for access to a change in its own price (all else constant). εOP = [% change in the demand for access]/[% change in the price of access]

If εOP > ( (

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