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An Analysis Of Equilibrium Relationship Between Price Elasticity And Expenditure Level: A Case Study Of Korean Mobile Market Data

  • Hongjai Rhee

    ()

    (School of Business Administration, Ajou University)

  • Sangkyu Rhee

    ()

    (Department of Economics, Chung-Ang University)

In most developing countries, telecommunications industry has been grown fast and still has more growth potential than in the developed countries. Clearly the telecommunications industry contributes to foster economic developments and also to narrow the communication gaps among countries. Among many components relating to the success of quick developments of telecommunication services, an appropriate and optimal pricing strategies is the most vital element. In this view point, this paper examines the optimal price discrimination strategy for firms in a monopolistically competitive market. The primary interest is the theoretical relationship between price elasticity and the average expenditure level of consumers. Our equilibrium analysis shows that the relationship can go either way (positive or negative) depending on the prevailing price level of the product in concern. As an empirical example, using a hierarchical Bayes model we find that heavy user of mobile service are substantially more elastic to the price of calls in Korea. A discussion of the optimal pricing scheme and market structure is in order.

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Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 34 (2009)
Issue (Month): 2 (December)
Pages: 69-83

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Handle: RePEc:jed:journl:v:34:y:2009:i:2:p:69-83
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  1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  3. Dipak C. Jain & Eitan Muller & Naufel J. Vilcassim, 1999. "Pricing Patterns of Cellular Phones and Phonecalls: A Segment-Level Analysis," Management Science, INFORMS, vol. 45(2), pages 131-141, February.
  4. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 38-56, Spring.
  5. David R. Bell & James M. Lattin, 1998. "Shopping Behavior and Consumer Preference for Store Price Format: Why “Large Basket” Shoppers Prefer EDLP," Marketing Science, INFORMS, vol. 17(1), pages 66-88.
  6. Jeongwen Chiang, 1991. "A Simultaneous Approach to the Whether, What and How Much to Buy Questions," Marketing Science, INFORMS, vol. 10(4), pages 297-315.
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