Demand in a Portfolio-Choice Environment: The Evolution of Telecommunications

The emergence of wireless telephone and broadband technologies has drastically altered the traditional household choice set for satisfying their communications needs. In this paper we explore this evolution. To do so, we extend the traditional (node-to-node) demand structure by permitting households to derive utility from communication with others while either the initiator or the recipient of communications is away from his node. This broader vision of communications demand permits us to estimate households’ demand for access to telecommunications services, paying particular attention to the portfolio mix of wireless and wired telephony. The model suggests that characteristics that capture households’ affiliation with their domicile are likely to drive consumers’ portfolio choices, as will the relative quality of the competing technologies. Finally, the model provides a basis for investigating the substitutability or complementarity of wireline and wireless services. We estimate this model of consumer choice using a unique database involving over 160,000 household-level observations drawn from the 2003-2009 period. The estimates reveal that households that are more affiliated with their domicile are significantly more prone toward wireline services while more “on the go” households are more attracted to wireless telephony. The estimations also reveal that relative quality convergence in wireless and wireline services has contributed significantly to shifts in consumers’ telephone portfolios. Finally, the data reveal that subscription to wireline and wireless telephony are substitutes rather than complements.