Mobile telephony and internet growth: impacts on consumer welfare

Innovation in digital technology has allowed rapid growth in mobile telephone and Internet adoption among consumers. The implication underlying the high rates of subscription growth is that consumers generally place a high valuation on telecommunication services. Moreover, since mobile telephone and Internet are predominantly telecommunication services, it is reasonable to presume that the network effect may be largely responsible for this growth. The implication of the network effect, where the consumer’s valuation of service increases with the size of the network is that subscription growth is endogenous. However, to date there have been few attempts to measure the change in consumer welfare as networks increase. Following Hausman (1981), this paper measures the change in consumer surplus based on the compensating variations approach. The result is an annual measure of the change in consumer surplus for the representative consumer for the OECD region. In addition, the approach reveals whether marginal consumer surplus is a decreasing or increasing function of network size. Measurement of the change in consumer welfare thus provides an additional tool for public policy analysis.