Estimating Demand for Cellular Phone Service under Nonlinear Pricing

Cellular phone carriers typically offer complicated nonlinear tariffs. Consumers make a discrete choice among several rate plans. Each plan has a nonlinear price schedule, and price is usually lower for in-network calls. I present an empirical framework to estimate demand under such nonlinear pricing schemes by using parsimonious data and apply the estimation method to analyze the cellular phone service market in Taiwan. Based on the estimated model, I evaluate the impacts of termination-based pricing schemes on the market structure. While the existence of in-network discounts causes considerable tipping effects on market shares, the effects come primarily from reducing the average prices, not from the difference between in-network and off-network prices. There is no evidence showing that termination-based pricing by itself has significant effects on market structure. Department of Economics, National Taiwan University, Taipei, Taiwan. E-mail: [email protected]. I would like to thank Aviv Nevo, John Panzar, Robert Porter, and William Rogerson for helpful comments and discussions. The Survey of Family Income and Expenditure was carried out by the Directorate General of Budget, Accounting, and Statistics of the Taiwan Government. The Center for Survey Research of Academia Sinica is responsible for the data distribution. I appreciate the assistance in providing data. Financial supports from Chiang Ching-kuo Foundation for International Scholarly Exchange, Center for the Study of Industrial Organization at Northwestern University and the National Science Council in Taiwan are gratefully acknowledged. All remaining errors are mine. 1