DO WIRELESS AND WIRELINE SERVICES COMPETE?

Transcription

1 DO WIRELESS AND WIRELINE SERVICES COMPETE? Preliminary - please do not quote July, 2000 Michael R. Ward University of Illinois Glenn A. Woroch University of California at Berkeley Fariza Ahmad University of Illinois

2 Overview Motivation regulatory issues hinge in local monopoly Goal estimate substitution patterns Model econometrics not quite right yet Results focus on usage rather than access Implications LECs highest margin services are vulnerable

3 Motivation (1) Worldwide Growth of Wireless Service What factors drive cellular penetration? What explains regional and national differences? What role has privatization and competition played?

4 International Wireless as of Late 1998 Country Subscribers (mi.) Population (mil.) Rate Belgium % Denmark % Finland % France % Germany % Italy % Netherlands % Norway % Spain % Sweden % United Kingdom % United States %

5 U.S. Wireless Market 70 $ Subscribers Avg Bill $90 $80 Millions of Subscribers $70 $60 $50 $40 $30 $/Mth 10 $20 $10 0 $0 Dec-98 Jun-98 Dec-97 Jun-97 Dec-96 Jun-96 Dec-95 Jun-95 Dec-94 Jun-94 Dec-93 Jun-93 Dec-92 Jun-92 Dec-91 Jun-91 Dec-90 Jun-90 Dec-89 Jun-89 Dec-88 Jun-88 Dec-87 Date

6 Motivation (2) Potential for Wireless to Compete with Landline Service How readily do consumers substitute? Do wireless carriers constrain pricing of incumbent wireline carriers? Under what conditions would consumers drop wireline service for wireless? Will LECs lose even if households keep wireline?

7 Motivation (3) Policy Issues Does substitutability imply diminishing market power for wireline carriers? Should bundling of wireline and wireless services be permitted? At what point is relaxed regulation advisable? Diminished ability for discriminatory dealing implies lifting long distance line-of business restriction?

8 Substitutability Both provide voice access to PSTN (dialtone, phone number,etc.) Main difference is mobility Other differences: bandwidth, quality, availability, cost, numbering, bundled features

9 Complementarity Wireless facilitates intra-household communication Accessibility enhanced relative to second wireline

10 Modeling Wireless Choice Decision Making Wireless conditional on at least one landline Treated as a household decision (Max U HH ) Unobservable Attributes Access: connection to PSTN Mobility: option value Both provide these attributes to some degree (cordless phones, payphones, cell phones at home)

11 Factors Affecting Wireless Usage Cost of Service: equipment, activation, monthly and usage fees for both services (employer provided/reimbursed) Demographic factors: Number, age, education and mobility of HH members, HH income, home ownership Vertical Services: Custom calling features, voice mail, connection to fax or PC Complements: Fax, PC, ISP Substitutes: Payphones, pager s, work phone

12 The Data PNR s Bill Harvesting IV Database (1998) From large national panel, residential phone bills from ~30,000 households Selected by whether submit local phone bill(s) (hence can t model wireline replacement by wireless)

13 Summary Statistics Observations 6,336 8,489 7,379 31,041 Wireless Price $42.07 $37.82 $35.25 $41.37 Wireline Price $28.97 $26.95 $26.76 $32.23 Wireless Subscribers 12.3% 13.8% 18.6% 25.1%

14 Summary Statistics (2) Any Local Toll Not a Wireless Subscriber 44.0% Wireless Subscriber 49.4% Average Local Toll Minutes Any Long Distance 77.7% 81.8% Average Long Distance Minutes

15 The Econometric Model First Stage: Predicting Prices Account for non-linear pricing: Expenditures = " + $ Minutes + ( Minutes 2 " and $ by geographic market Instrumental Variables Use estimates of " and $ to as expected marginal prices for subscription and usage Do this for both Wireless and Local Telephone Bills

16 Econometric Model (2) Second Stage: Telephone Choices Logit of wireless subscription as function of wireless and wireline access and usage prices Reg of minutes of wireless calls... Same for local toll Same for LEC handled long distance

17 Econometric Model (3) Interpretation Change in number of customers calling is extensive margin from logit Change in calling amount per customer is intensive margin from regression Need to sum both extensive and intensive margins

18 Wireless Access and Usage Elasticity Results Access Any Usage given Access Usage Amount given any Usage Price Local Access * * Price Local Usage 0.139* Price Wireless Access * Price Wireless Usage * 0.078

19 Local Toll Usage Elasticities Any Usage Usage Amount Wireless Not Wireless Not Price Local Access * * * * Price Local Usage * * * * Price Wireless Access Price Wireless Usage

20 LEC Handled Long Distance Usage Elasticities Any Usage Usage Amount Wireless Not Wireless Not Local Access Price * * * Local Toll Price 0.224* Wireless Access Price Wireless Usage Price

21 Future Work Fix Econometric Model Links in Access and Usage demand imply more complex model Fariza is working on it New data for 1999 in hand as of last week Deal with household idiosyncratic effects? Other Services? Cable TV, ISP

22 Research Implications Substitutability is likely to be in usage, not subscription I ve got ISP, Broadband (soon!), wireless and no intention of dropping wireline. Substitutability likely to increase Wireless prices fall, quality improves, features added. Can wireless infuse competition where CLEC don t? Facilities, not resell; Broadly available; Enough licenses?