Working Paper: CEPR ID: DP5780
Authors: Kjetil Andersson; Ystein Foros; Frode Steen
Abstract: Text messaging has become an important revenue component for European and Asian mobile operators. We develop a simple model of demand for mobile services incorporating the existence of call externalities and network effects. We show that when incoming messages and calls stimulate outgoing communications, services that are perceived as substitutes, such as mobile text and voice, may evolve into complements in terms of the price effect when the network size becomes large. We estimate the demand for text messaging in the Norwegian market and find that the cross-price effect of voice depends on the network size. Voice is a substitute for text messages for small network sizes, and a complement for large network sizes.
Keywords: Call externalities; Demand structure; Network effects; Positive feedback effects; Text messaging
JEL Codes: C2; D12; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of incoming calls/messages (L96) | number of outgoing calls/messages (L96) |
| network size (D85) | cross-price effects between text and voice (L96) |
| network size (small) (D85) | voice calls are substitutes for text messaging (L96) |
| network size (large) (C55) | voice and text messaging evolve into complements (L96) |
| network growth (D85) | increased text messaging (L96) |
| cross-price elasticity changes sign (D11) | relationship between voice and text messaging (L96) |