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

Abstract

In addition to wireless telephony boom, a similar exponential increasing trend in wireless data service -for example, short message service (SMS) – is visible as technology advances. We develop a structural model to examine user demand for voice and SMS services. Specifically, we measure the own- and the cross-price elasticities of these services. The cross-price elasticity is of significant importance because marketing activities are critically influenced by whether the goods are substitutes or complements. The research context poses significant econometric challenges due to three-part tariffs, and sequential discrete plan choice and continuous quantity choice decisions. Using detailed individual consumption data of more than 6000 customers, we find that SMS and voice services are small substitutes. A 10% increase in the price of voice minutes will induce about 0.8% increase in the demand for SMS. The own price elasticity of voice is also low, to the order of approximately -0.1. Younger users’ demand is far more inelastic than that of older users. We then conduct counterfactual policy experiments that fully capture the effects of change in key parameters on the firm revenues. Finally, we discuss the generalizability of our framework.