Network effects in mobile telecommunications: An empirical analysis

This paper explores the role of network effects in the consumer’s choice of mobile phone operator in the UK. For our empirical analysis we use two sources of data: market-level data from OFCOM and micro-level data on consumers’ usage of mobile telephones from the survey Home Online. We estimate two classes of models which illustrate the role of network effects. The first is a model of the comparative volume of on-net and off-net calls. This finds that the proportion of off-net calls falls as mobile operators charge a premium for off-net calls, but even in the absence of any price differential between on-net and off-net, there is still a form of pure network effect, where a disproportionate number of calls are on-net. The second is a model of the individual consumer’s choice of operator. This finds that individual choice shows considerable inertia, as expected, but is heavily influenced by the choices of others in the same household. There is some evidence that individual choice of operator is influenced by the number of subscribers for each operator. This second model is estimated in two forms: one where network effects and price effects do not interact and the other where they do interact, as suggested by theoretical considerations. We find that the non-interactive form fits the data better than the interactive form, suggesting again that there are some pure network effects at work, independent of price differentials. JEL classification: D12, L96, M31