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Pricing Patterns of Cellular Phones and Phonecalls: A Segment-Level Analysis

Listed author(s):
  • Dipak C. Jain

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208-2001)

  • Eitan Muller

    (Recanati Graduate School of Business, Tel Aviv University, Ramat-Aviv, Tel Aviv 69978, Israel)

  • Naufel J. Vilcassim

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089-1421)

Registered author(s):

    One expectation of the U.S. Federal Communications Commission (FCC) in the early stages of the cellular communications industry was that the presence of two licensees in each market would ensure competition, and thereby result in declining prices over time for both cellular phones (handsets) and phonecalls. However, industry observers have noted recently that although the price of handsets has declined over time, the price of the phonecalls has not. We investigate this interesting pricing issue by modeling the market interaction between the providers of cellular services and also their interaction with customers using a game theoretic framework. A critical assumption in the development of our model is that there exist segments of customers with different valuations, usage levels, and price sensitivities for cellular service. Empirically, we provide support for the existence of two customer segments (viz., Business/Professional and Personal) from both secondary data on industry usage and revenue, and primary data collected from a conjoint analysis study of cellular service customers. From the latter source, we also establish that the Business/Professional customers are more sensitive to prices of phonecalls than the Personal segment. From our analytical model, we characterize the conditions under which penetration and skimming pricing strategies for the handsets are profit-maximizing from the sellers' standpoint, and derive the corresponding price of phonecalls. One of our main analytical results is that a competitive structure can result in lower prices over time for the handset, but higher prices for the phonecalls, depending on production costs of the handset. We are thus able to provide a theoretical explanation for the observed price patterns for the handset and phonecalls.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 2 (February)
    Pages: 131-141

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:2:p:131-141
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    1. Philip M. Parker & Lars-Hendrik Roller, 1997. "Collusive Conduct in Duopolies: Multimarket Contact and Cross-Ownership in the Mobile Telephone Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 304-322, Summer.
    2. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    3. Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 355-371.
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