Tex and Voice: Complemens, Subsiues or Boh? ψ Kjeil Andersson Telenor R&D kjeil.andersson@elenor.com Øysein Foros Norwegian School of Economics and Business Adminisraion oysein.foros@nhh.no Frode Seen Norwegian School of Economics and Business Adminisraion and CEPR frode.seen@nhh.no Sepember 2006 Absrac Tex messaging has become an imporan revenue componen for mos mobile operaors. We develop a simple model of demand for mobile services incorporaing dynamics of informaion exchange. We show ha when incoming communicaion simulae ougoing communicaion, services ha iniially may be perceived as subsiues, such as mobile ex and voice, may evolve ino complemens in erms of he price effec when he nework size becomes large. We esimae he demand for ex messaging in he Norwegian marke and find ha he crossprice effec of voice depends on he nework size. Voice is a subsiue for ex messages for small nework sizes, and a complemen for large nework sizes. Keywords Tex messaging, cross-price elasiciy, dynamics of informaion exchange ψ We hank Gorm Grønneve, Erik Ø. Sørensen and Lars Sørgard for valuable commens. Furhermore we hank seminar paricipans a EARIE 2006, Amserdam, he Norwegian Compeiion Auhoriy, he Norwegian School of Economics and Business Adminisraion, he Norwegian Universiy of Science and Technology and he Poruguese Compeiion Auhoriy. Finally, Kjeil Andersson hanks Telenor R&D for financial suppor, Øysein Foros and Frode Seen are graeful for financial suppor from he Research Council of Norway hrough he research programs KIM 1303 and ISIP 154834, respecively. 1
1 Inroducion No ex please, we re American is The Economis s headline when zooming on he sriking discrepancy beween Europe and he Unied Saes when i comes o he ake-up of ex messaging (The Economis, 2003). While he average monhly usage exceeded sixy messages in several European counries in 2004, he corresponding figure for he Unied Saes was seven. 1 According o The Economis The shor answer is ha, in America, alk is cheap. The early adopers of ex messaging in Europe seemed o be price sensiive eenagers who found ex messaging a cheap alernaive o mobile calls. In he Unied Saes mobile voice calls are less expensive han in Europe, hence Americans prefer o make voice calls. 2 Revenues from ex messaging (SMS) are now significan in several European and Asian counries. In Norway, SMS revenues amouned o an overwhelming 20% of oal mobile revenues in 2002, one hird of he revenues from mobile voice raffic. 3 Tex messaging has grown o become somehing much more han a niche produc for he youh marke. The mobile phone is a plaform ha enables informaion exchange hrough several differen channels. 4 In he following we focus on he wo, a presen, primary channels for person-operson communicaion, namely voice calls and ex messaging. A mobile subscriber ha wans o exchange informaion wih anoher mobile subscriber may choose ex, voice or boh. Which channel(s) ha will be uilized in each paricular siuaion obviously depends on a hos of facors relaed o individual preferences, wha kind of informaion is in quesion, and he conex of boh he sender and he receiver. The implici assumpion in he explanaion of he ex messaging ake-up in Europe, and he differences in usage beween Europeans and Americans saed previously, is ha ex and voice are subsiues. Alhough i is likely ha consumers in many siuaions consider ex messaging and voice o be inerchangeable channels for exchange of informaion, ex messaging conains feaures ha differeniae i from voice as communicaion medium. For insance, ex messaging does 1 The picure is no enirely homogeneous in Europe. The French seem o agree wih he Americans in heir view on ex messaging. SMS is less popular in France and Sweden han in mos oher pars of Europe (The Economis, Texing: Je ne exe rien, July 10h 2004). 2 Oher explanaions may be ha insan messaging services are more widely adoped in he Unied Saes han in Europe. Moreover, in he Unied Saes differen wireless sandards are in use, and hese have unil recenly been incompaible wih respec o ex messaging. In addiion, while ex messaging is available o all GSMsubscribers in Europe, exing is ofen offered as an addiional service in he Unied Saes. 3 Source: The Norwegian Pos- and Telecommunicaion Auhoriies saisics. 4 A ypical GSM 2G mobile phone includes voice, ex messaging (SMS), mulimedia services (MMS) and Inerne access hrough he WAP proocol. 2
no require insananeous aenion by he receiver. Thus, a ex message can be sen even if he sender knows ha he recipien will no read i or respond immediaely. Furhermore, compared o voice, ex messaging may be more discree. Some people (bu no all) find i inappropriae o alk on he mobile phone on he bus or a a meeing. Hence, ex messaging can be uilized in siuaions where voice would no be considered as an alernaive. Conversely, in oher siuaions he ex message user-inerface may be considered oo slow and cumbersome compared o a phone call. In such siuaions ex messaging and voice may be weak subsiues. They may even be complemenary services. A call cener operaor for insance, may send supplemenary informaion by SMS o he caller. In his paper we are no ineresed in he poenial varying relaionship beween ex and voice a he micro level per se. Raher, we wan o invesigae how he workings of wha has been referred o as he dynamics of informaion exchange by Taylor (1994) may affec his relaionship regardless of wheher cusomers rea he services as subsiues or complemens. In paricular, we wan o see wha dynamics of informaion exchange implies for he specificaion of a reduced form esimaing equaion on marke daa. Dynamics of informaion exchange refer o a siuaion in which an exchange of informaion creaes he need for furher exchanges of informaion, (Taylor, 2002: p 103). Consider he case of a call from person A o B. This may cause B o reurn a call o A, reverse or reciprocal calling. Bu i can also induce B o make a new call o C which in urn makes a call o D and so forh. As poined ou by Taylor such dynamics can operae whenever, by whaever means, a piece of informaion is injeced ino a group ha forms a communiy of ineres, (Taylor 2002: p 103). This descripion fis he marke for ex messaging exraordinary well. Tex messaging is a communicaion ool ha is used o spread informaion quickly wihin a communiy, wheher his is a group of friends, family or business colleagues. Larson, Lehman and Weisman (1990) represen a pioneering effor in empirical modelling of elecommunicaions demand ha akes accoun of reverse raffic. Uilizing a household producion approach where he agen derives uiliy from boh incoming and originaed calls, hey se up a model of fixed line poin-o-poin oll demand beween 9 ciy pairs. The esimaing equaions of originaed minues from ciy i o ciy j includes he reverse raffic flow as an endogenous regressor. They find a srong and significan posiive effec of reverse raffic. We are no aware of any empirical sudies ha repor on he dynamics of informaion exchange for mobile services, alhough models wih call exernaliies have been sudied in 3
some heoreical works. Cambini and Vallei (2005) se up a heoreical model of compeiion beween wo mobile neworks and show ha posiive reverse raffic effecs from off-ne calls will reduce he incenives o use off-ne price discriminaion. 5 In his sudy we se up a model ha allows for dynamics of informaion exchange when wo services (ex and voice) are offered on he same plaforms. This means ha in addiion o wihin service dynamics we allow for cross-effecs beween he wo communicaion services, i.e. we allow he number of incoming calls o affec ougoing ex messages and vice versa. We develop reduced form demand equaions ha ake accoun of no only he reverse communicaion effec, bu also he induced effec in he dynamics of informaion exchange hypohesis, and invesigae he properies of he price effecs. To our knowledge, his sudy represens he firs aemp o esimae a demand funcion for ex messages on marke daa. Our primary concern is o use he demand model o deermine he relaionship beween voice and ex messaging by esimaing he cross-price elasiciy of voice. We uilize a quarerly daase of ex messages for he Norwegian incumben mobile operaor in he period when ex messaging became popular in Norway (1996:2-2004:2). In he regressions, he number of messages per subscriber is mached wih price daa for mobile voice, ex messages and nework size. We find ha even if consumers iniially consider voice o be a subsiue o ex messaging, as he nework grows voice may urn ino a complemen in erms of he price effec. When his model is mached wih daa in secion 4, we find ha voice is a subsiue for normalized nework sizes below 0.3 and a complemen above 0.3. 6 The lieraure on mobile demand has for he mos par been occupied wih he diffusion of mobile subscripions, see Gans, King and Wrigh (2005), and he sudies referred o below. Few sudies have examined he demand for mobile services. Economeric analysis of he demand for mobile calls includes Haucup and Dewener (2004), and work by DoEcon and Fronier Economics referred o in he Compeiion Commission (2003). Neiher of hese includes he SMS price in heir esimaing equaions, assuming ha he wo services are independen. 7 Thus, he relaionship beween he wo services remains unesed on real marke daa. 8 Our paper is also relaed o he analyses of he relaionship beween fixed-line and 5 Cambini and Vallei (2005) denoe his posiive feedback effec he propagaion facor. 6 The nework variable is normalized o ake he value 1 in he las quarer of 2004. A nework size of 0.3 is reached already in he fourh quarer of 1998. 7 Anoher reason for no including he ex message price may be ha here is no variaion in he price in he sample. 8 The Compeiion Commision (2003) also refers o a conjoin survey analysis by Holden Pearmain Research. This analysis finds ha mobile calls and SMS are complemens. 4
mobile elephony. Using world daa of mobile peneraion raes, Gruber and Verboven (2001a) and Ahn and Lee (1999) find ha fixed and mobile elephony largely are complemens. In conras Gruber and Verboven (2001b) use peneraion daa from he European Union in he period 1991-1997, and hey find a subsiuion effec beween fixed and mobile phones. Cadima and Barros (2000) and Sung and Lee (2002) repor analogous resuls by using daa from Porugal and Korea, respecively. 9 Gans, King and Wrigh (2005) emphasize ha he conflicing resuls may be due o he fac ha fixed and mobile phones iniially were complemens, bu as mobile peneraion has increased mobile and fixed elephony have become subsiues. The res of he paper is organized as follows: In secion 2 we give a brief overview of he evoluion of ex messaging. In secion 3 we presen a simple heoreical model ha shows ha communicaion services offered on he same plaform may evolve from subsiues o complemens as he nework size increases. In secion 4 we presen he economeric model and resuls, while we in secion 5 offer some concluding remarks. 2 The evoluion of he marke for ex-messaging 10 As menioned in he inroducion, he combinaion of cheap ex messages and high minue prices on mobile calls may be a key facor for he success of ex messaging in several European counries. This srucure was paricularly imporan for he new cusomer groups ha enered he mobile markes in he lae 1990s. A large par of hese cusomers bough prepaid cards wih very high prices for calls. Teenagers, for insance, quickly grasped ha hey could communicae much cheaper by ex messages han calls. Anoher key explanaion for he differences beween Europe and he Unied Saes is compaibiliy and inerconnecion. In Europe he GSM sandard dominaes and all mobile subscribers have he abiliy o use ex messaging. 11 Compeing mobile providers agreed on 9 Oher analyses of he diffusion of mobile phones are Koski and Kreschmer (2005), Gruber (2001), Liikanen, Soneman and Toivanen (2004) and Jang e al. (2005). In addiion o Gans e al. (2005), Gruber (2005) gives a comprehensive survey of he lieraure and he economics of mobile elecommunicaions. 10 A more comprehensive descripion of he evoluion of ex messaging wih a focus on he Norwegian marke, is given by Andersson, Foros and Seen (2006). 11 Tex messaging or SMS is a non-proprieary sandard ha was developed in he early 1990s by he cross indusry forum GSM Associaion, and SMS was par of he GSM sandard. The iniial applicaion was o send voice mail noificaions from he nework operaors o heir subscribers. The iniial purpose also explains he limied funcionaliy and capaciy of SMS. An SMS message can only conain up o 160 characers. To overcome hese problems he handse producers have included new feaures o improve he user inerface wih 5
bilaeral compaibiliy agreemens (inerconnecion) ha ensured ha people could send messages regardless of which operaor he recipien subscribed o. Wih respec o mobile-omobile ex messaging, a complee degree of naional compaibiliy has been agreed on in mos European markes. In Norway he wo providers, Telenor and Necom, have had such agreemens since he fourh quarer of 1996. The number of SMSs increased by abou 30% in Telenor s nework immediaely afer his agreemen was enforced. In addiion o he echnological compaibiliies beween neworks here has also been compaibiliy in he pricing wih respec o ex messaging. Whereas he voice price has differed largely beween on-ne and off-ne calls, he SMS price has been independen of he nework of he receiver. In he Unied Saes, in conras, differen wireless sandards are in use, and hese have unil recenly been incompaible wih respec o ex messaging. In addiion ex messaging is ofen offered as an addiional service in he Unied Saes. All his has hampered he possibiliy o fuel marke growh by posiive nework effecs. Scandinavia is among he areas where he ake up and use of mobile services have been mos inense. 12 By he second quarer in 2004 a Norwegian mobile cusomer sen approximaely 70 SMS messages per monh, and he growh seems o coninue. The mobile peneraion rae was 0.15 in 1996 and has grown o 0.99 in he second quarer of 2004. 13 Thus, by mid 2004 here was basically one mobile subscripion per capia in Norway, mirroring he fac ha Norway was very early in he ake up of boh mobile voice and ex messaging. The developmen of ex-messaging and mobile subscripions is shown in Figure 1. respec o yping messages, such as he opion o sore pre-defined message emplaes, dicionaries and predicive ex, and special keyboards. 12 Scandinavian people have also hisorically been early adopers of elecommunicaions services. Holcombe (1911) and Webb (1911) were he firs who paid aenion o he early and fas diffusion of fixed line elephones in Scandinavia. 13 Noe ha his rae does no imply ha all Norwegian inhabians have a mobile phone subscripion. A number of people have double subscripions (work, home) and some have sleeping subscripions in erms of prepaid cards ha are no in use. 6
Figure 1 Growh of SMS messaging and subscripions in Norway for he period 1996 o 2004 Subscribions SMS per subscriber quarerly 5000000 250 4500000 Subscripions 4000000 3500000 3000000 2500000 2000000 1500000 1000000 200 150 100 50 SMS per subscriber quarerly 500000 0 0 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 3 Dynamics of informaion exchange for mobile services Concepually, he demand for mobile services can be divided ino wo sages: A he firs sage is he demand for access and a he second sage is he demand for he offered mobile services, condiioned on being a subscriber o he nework. We concenrae on he second sage. Le x and x v denoe he number of originaed ex messages and voice minues per subscriber per ime period. As discussed in he inroducion he dynamics of informaion exchange phenomenon refers o he siuaion where an exchange of informaion creaes he need for furher communicaion (Taylor, 1994, 2002). These dynamics can be of wo kinds: Firsly, a communicaion session (call or message) from cusomer A o cusomer B may cause B o iniiae a communicaion session o A. This is he reverse calling effec. In addiion here may be an induced effec. This refers o he siuaion where he communicaion session from A o B causes B o iniiae a session o C (and C o D and so on). We will in he following refer o he reverse calling effec and induced effec as posiive feedback. 7
To capure he posiive feedback effecs we allow he number of originaed communicaion sessions in he nework o affec he number of originaed communicaion sessions per subscriber. We assume a linear srucural demand and wrie he demand per subscriber as x = β + β + β p + β nx + β nx + β n i i0 i1 p i i2 j i3 i i4 j i5 (1) where i,j=,v and i j, n is nework size normalised such ha n [ 0,1 ], and uni prices are given by p i and p j. β i1 and β i2 are he marginal own- and cross-price effecs holding he oal communicaion consan. We denoe hese as he direc price effecs. We assume a negaive direc own price effec, i.e. β i1 0. Assume furher, for he sake of comparison, ha β 0 i2. This is in line wih he casual observaions referred o previously, i.e. ha early adopers considered ex messaging and voice o be subsiues. The hird and fourh erms capure he posiive feedback effecs, i.e. he join effecs of reverse calling and induced effecs: β i3 capures wihin service feedback and β i4 across service feedback. In line wih he dynamics of informaion exchange hypohesis we assume ha hese feedback effecs are posiive. The las erm capure he join effec of poenial nework effecs and composiion effecs and may ake any sign. Solving he sysem for x and x v we obain he following reduced form demand funcions: x = π + ( n) p (2) i i0 + π in( n) + π ii( n) pi π ij j where he marginal effecs are given by, ( 1 nβ )( β + β n) β ( β )) π + 1 i0 + π in = A ( j3 i0 i5 n i4 j0 + β j 5n (3) xi p i 1 = π n) = A ((1 nβ ) β + nβ β ) 0 ii ( j3 i1 i4 j 2 (4) xi p j 1 ij ( n) = A ((1 nβ j3) βi2 nβ j1βi4 ) = π + (5) A 2 = ( 1 nβi3 )(1 nβ j3) n β j4βi4 > 0 (6) 8
We assume ha A is always sricly posiive (6), and ha he marginal own-price-effecs are always non-posiive (4) 14. The marginal cross-price effec is equal o he direc cross-price effec in he srucural demand equaion (1) when he nework size is zero: x i p j n= 0 = β 0 (7) i2 Thus, when he nework size is small, ex and voice will be subsiues. From equaion (5) we see ha he erm ( 1 nβ β + nβ β ) ( j i2 j1 i4 3) deermines he sign of he cross-price effec. This erm is decreasing in n. If i changes sign and becomes negaive for some marginal cross-price effec will be negaive when he nework size is above n * ( 0, 1), he. I is sraighforward o show ha he condiion ha ensures ha he marginal cross-price effec will change sign for a ( 0,1) n * is ha: β j1βi4 > βi2( 1 β j3) (8) * Thus, if he inequaliy in (8) holds, we have ha x / p < 0 if n > n and x i / p 0 if i j * n j n * < 1. Thus, he larger he feedback effecs, β and β i4 n j3, and he lower he direc subsiuion effec, β i2, he more likely i is ha voice and ex become complemens in a maure marke. The inuiion for he resul is as follows: Consider a decrease in he price of voice. This causes an increase in he demand for voice. This in urn increases he number of incoming calls for all subscribers. The larger he nework, he higher he number of incoming calls. Some cusomers prefer o respond o hese calls by ex messages. If hese feedback effecs are srong hey may dominae he direc subsiuion effec from β i2 0. Hence, he decrease in he voice price may cause an increase in ex messaging leaving voice as a complemen o ex in erms of he marginal cross-price effec. 4 The economeric model We wan o esimae he own-price and cross-price effecs in he demand for SMS, condiioned on being a subscriber o a nework. The dependen variable is he number of 14 The assumpion in (6) pus resricions on he size of he posiive feedback effecs. Pu loosely, i secures ha he feedback effecs canno joinly be oo large. 9
SMS s per subscriber for he Norwegian incumben operaor Telenor, SMS, see figure 1 in secion 2 and able 1 below. This variable is consruced by dividing he oal number of originaed SMS by Telenor subscribers by he number of Telenor subscripions enabled for SMS. 15 The dependen variable is measured quarerly from he 2 quarer of 1996 o he second quarer of 2004 leaving 33 observaions. In he esimaing equaion his variable is mached wih a weighed average price per SMS message, PPS, a weighed average price per minue called, P V P, he number of subscribers in he Norwegian marke, N, and a dummy, CPA, for he inroducion of premium SMS. 16,17 The number of subscribers, N, is normalised such ha 2004:4=1). 18 Premium SMS was inroduced in he second quarer in 2000, hence he CPA dummy akes he value 1 from quarer 2, 2000. 19 The summary saisics of he variables are presened in Table 1. Table 1 Summary saisics Obs Mean Sd. Dev. Min Max Coninuos Variables SMS per subscriber (SMS) 33 102.30 82.95 0.38 220.03 Price SMS (PPS ) 33 1.17 0.32 0.71 1.58 Price Voice (PPV ) 33 2.39 0.45 1.84 3.32 Number of Subscripions 33 2 630 302 1 232 841 654 804 4 347 086 Normalized Subscripions (N) 33 0.605 0.284 0.151 1 Dummies CPA 33 0.515 0.508 0 1 Insrumens Income per subscriber NeCom 33 3623.60 356.01 553.04 3809.19 Price fixed line elephone peak 33 1.03 0.15 0.72 1.15 Price fixed elephone off peak 33 0.85 0.14 0.43 0.96 The poin of deparure for he esimaing equaion is he reduced form equaion (2) given in he previous secion. In his model he price effecs depend on he nework size. We assume a 15 The number of subscripions enabled for SMS corresponds o he number of GSM subscripions excep for a shor period in 1998 when he prepaid subscribers were no enabled for SMS. 16 We are graeful o Telenor for providing hese daa. A more comprehensive explanaion is provided in he Appendix A. 17 More recenly we have seen several new conracs offering free SMS messages as par of he conracs. However, even in our las sample year 2004 hese conracs were very rare o observe. 18 These can be found on www.np.no, he home page for he Norwegian Pos and Telecommunicaion Auhoriy. 19 Premium SMS is informaion services where he messaging sysem is used for downloading of logos and ringones, voing, ineracive TV, quizzes and games, jokes, being, pay per view web conen and so on. In 2000 he mobile providers in Norway inroduced Conen Provider Agreemens (CPAs) ha allowed informaion providers o offer such services. 10
linear model, and o allow for nework dependen price effecs we include wo erms were prices are ineraced wih he nework size. The demand model esimaed is hus given as SMS = α + β P N S + β N S + β + β CPA SN N P S CPA + ε, + β V P V + β VN N P V (9) where he variables are defined as above and ε is an error erm assumed o have he sandard 2 saisical properies, i.e., ε is i.i.d. and ~ (0, σ ). ε In he esimaion we rea he nework size a he beginning of he period, N, and he dummy for inroducion of premium SMS, CPA as predeermined. The prices may, of course, be endogenous. Hence, we presen esimaion resuls using boh Two Sage Leas Squares (2SLS) and ordinary Leas Squares (OLS). We look a he insrumens performance and compare he models using a Hausman ess. As insrumens we use income per subscriber for he main compeior NeCom, he peak and off peak 3 minue prices for fixed-line voice calls, and ineracions of hese wih he nework variable o insrumen for he Telenor prices and he ineracion erms. 20 The resuls are summarized in Table 2 21. Boh he OLS and he 2SLS model behave well, boh in saisical erms and wih regard o economic predicions. All he price parameers and he nework parameers are significan in boh models wih corresponding signs bu differen magniudes. In he OLS model also he CPA dummy and he consan erm are significan. The explanaion power is high, and he Box-Pierce ess (Q1 and Q4) show no or very lile sign of auocorrelaion. We have also esed he error erm using Augmened Dickey Fuller 20 The Necom numbers are colleced from Necom s webpage and annual repors. We are graeful o Bene Johnsen in NeCom for help in collecing hese. The fixed ne prices are from he Inernaional Telecommunicaion Union (World Telecommunicaions Indicaors); I153, Cos of a local 3 minues call (peak rae), I153O, Cos of a local 3 minues call (off-peak rae). 21 We have also esimaed a non-linear diffusion model where we can disinguish beween differen sources of subscripion growh (Bernd, Pindyck and Azoulay, 2003). For a more general discussion of hese models see Mahajan, Muller and Bass (1990). The problem wih his approach is ha we have a relaively shor daase when i comes o asympoic esimaors, resuling in very unsable resuls, and very ofen lack of convergence in our models. These resuls are herefore omied here. 11
Table 2 OLS and 2SLS resuls for he demand model OLS 2SLS Coefficien Sandard Error Coefficien Sandard Error S P -83.366 * (41.768) -251.192 *** (106.536) P S N 167.726 ** (75.827) 109.895 *** (29.333) V P 71.125 *** (15.230) 488.936 *** (210.838) P V N -225.054 *** (50.597) -448.468 *** (144.130) N 540.863 *** (40.143) 598.416 *** (60.993) CPA 18.427 *** (6.822) 14.642 (9.403) Consan -112.880 *** (46.441) 53.950 (110.739) R 2 0.994 0.996 N 33 33 Q1 0.465 *** 0.818 *** Q4 9.97 ** 13.863 DF(0) -4.554 *** -4.802 *** DF(2) -5.41 *** -5.89 *** Hausman(6) 3.09 *** Significan a a 2.5% level, ** Significan a a 5% level, * Significan a a 10% level, ess and can rejec non-saionariy in he error erms clearly for boh he OLS and he 2SLS model. 22 When we look a he firs sage regressions in he 2SLS model he insrumens are clearly correlaed wih he poenial endogenous variables. The six exogenous insrumens (income Necom, fixed elephone line prices and heir ineracion erms wih subscripions), are significan a a 5% level or beer in 20 ou of 24 cases (4 equaions, 6 insrumenal variables in each) and in he remaining four cases 3 show significance a a 10% level. The Hausman es however suggess no significan difference in he OLS and he 2SLS model resuls, suggesing ha we can use he more efficien OLS model. The discussion of economic predicions will herefore be based on he OLS model. However, he 2SLS predicions differ only in magniude and no in erms of qualiaive predicions. 23 The CPA dummy suggess a significan and posiive effec from he inroducion of premium SMS. The direc price effecs are in line wih he assumpions in he heoreical model in he previous secion, i.e. a negaive direc marginal own-price effec (-83) and a posiive marginal 22 An alernaive inerpreaion of he Dickey-Fuller resuls is ha he esimaed relaions represen coinegraed seady sae relaions. 23 Boh models and heir predicions are robus owards inclusion of seasonal dummies and ime rend. However, since hese were no significan hey are omied from he models ha are presened here. 12
cross-price effec (71) suggesing ha voice is a subsiue o ex messaging for small nework sizes. Boh ineracion erms are significan which implies ha he marginal price effecs are dependen on nework size as prediced by he model in he previous secion. To ge a beer undersanding of he size of he economic effecs we ranslae he poin esimaes ino elasiciies evaluaed a he mean of he involved variables. 24 Table 3 Esimaed elasiciies a means Elasiciy a mean Sandard Error 95% confidence inerval Own price elasiciy 0.207 (0.205) [-0.214, 0.629] Cross price elasiciy -1.517 *** (0.508) [-2.561, -0.473] Nework elasiciy 1.185 *** (0.149) [0.879, 1.491] *** Significan a a 2.5% level, ** Significan a a 5% level, * Significan a a 10% level. For average prices, quaniy and nework size he own price elasiciy is indisinguishable from zero. This suggess ha once he cusomer has decided o become a subscriber, he uni price does no consrain he usage of ex messaging. The SMS price may however affec he choice of subscripion (which we have no modelled here). If so, his would resric he provider s abiliy o raise he uni price indefiniely. For he average nework size of 0.6, he cross-price elasiciy is -1.5. Thus, in erms of he price effec, voice is a complemen o ex messaging. The posiive effec of PPV and he negaive effec from he ineracion erm, P V N, implies ha when he nework is small voice is a subsiue o ex, bu as he nework size increases he cross price effec changes sign and we ge a complemenary relaionship beween voice and ex. The cross price effec changes sign when he normalized subscripion variable reaches 0.32. This paern suppors he exisence of posiive feedback as described in he previous secion. A means he nework elasiciy is 1.18 i.e., when he nework increases wih 1%, he number of originaed messages per subscriber increases wih roughly 1%. The resul suggess ha posiive nework effecs dominae a possible negaive effec from decreasing aciviy from addiional cusomers. This resul is in conras o Dewener and Haucup (2004) who find a 24 Noe ha boh price elasiciies and he nework elasiciy consis of a direc effec and an indirec effec from he ineracion erm, e.g., he own price elasiciy evaluaed a mean is S [ β + βˆ N ] [ P SMS ] ˆ. S SN 13
negaive effec from nework size in heir esimaion of mobile calls on Ausrian daa from 1998-2002. 5 Concluding remarks In a simple model we show ha if mobile calls simulae ex messaging, voice will be a weaker subsiue o ex he larger he nework. If such posiive feedback effecs are srong voice may even urn ino a complemen when he nework becomes large. Uilizing daa from he Norwegian mobile incumben we find ha mobile voice calls were a subsiue o ex messaging in he infancy of he diffusion process and evolved ino a complemen as he nework size became larger. This suggess ha feedback effecs are imporan in he demand for ex messages. An ineresing fuure challenge is o look for more deailed daa on incoming communicaions, since his would enable a direc es of he posiive feedback explanaion. The case analyzed poins a a poenially changing relaionship beween wo communicaion services offered a he same plaform and bring abou ineresing challenges for pricing. If an evenually complemenary relaionship beween he services is overlooked when considering he inroducion of a new service, one risks pricing he emerging service oo high relaive o he exising service. This may preven he ake-up of a subsiue ha laer urns ino a complemen o he curren service. This poenial demand side link beween maure and emerging services has no been given much aenion from policy makers and marke players. 14
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Appendix 1 - Daa descripion SMS per subscriber: Number of originaed SMSs by cusomers of Telenor Mobil divided by number of SMS-enabled subscribers of Telenor Mobil 25. By SMS-enabled is mean he pospaid GSM subscribers and he prepaid GSM subscribers from he fourh quarer of 1998 (This was when SMS was enabled for he prepaid cusomers). Sources: The quarerly repors of Telenor Mobil and inernal sources in Telenor Price SMS: The average price of originaing an SMS for Telenors cusomers. This is he weighed average of he prepaid SMS price and a pospaid SMS price index. The weighs are he proporion of prepaid and pospaid cusomers measured each quarer. The pospaid SMS price index is a weighed average of he SMS prices in he wo main pospaid call-plans Priva and Priva+. The weighs are obained from a ime-invarian esimae of he share of cusomers on he wo call plans. Sources: The quarerly repors of Telenor Mobil, he press archive of Telenor Mobil and inernal sources in Telenor. Price Voice: The average price of originaing onr minue of mobile call. This is he weighed average of he prepaid per minue price index and he pospaid per minue price index. The weighs are he proporion of prepaid and pospaid cusomers measured each quarer. The minue price indices are consruced from he call-plan specific on-ne and off-ne, peak and off-peak minue prices, weighed by a ime-invarian esimae on he disribuion of minues on call-ypes. Source: The quarerly repors of Telenor Mobil, he press archive of Telenor Mobil and inernal sources in Telenor. 25 Telenor Mobil is he Norwegian mobile affiliae of Telenor ASA. 17