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On the distance dependence of the price elasticity of telecommunications demand; review, analysis, and alternative theoretical backgrounds

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  • Piet Rietveld

    (Free University Amsterdam, Faculty of Economics, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands)

  • Hans Ouwersloot

    (University Maastricht, Faculty of Economics, PO Box 616, 6200 MD Maastricht, The Netherlands)

Abstract

The positive correlation between the absolute price elasticity of telecommunications demand and the distance of the calling relation is often suggested and presented as an empirical regularity. In this paper we first present an overview of existing studies to buttress the distance dependence empirically. A statistical analysis of the results confirms the existence of distance dependence, and gives insight into the size of the effect: doubling the distance leads to an increase of the elasticity of 0.07. Next we look for various explanations of the distance dependence. We analyze the roles of the functional form of demand functions in conjunction with the dependence of price on distance, and consider whether spatial interaction theory can provide an explanation. One of the interesting findings is that the price effect may explain the distance dependence, but that this explanation is not unequivocal. In addition we show that incorporating spatial interaction theory elements in a quite basic utility maximization model of information demand also leads to distance dependent telecommunications demand.

Suggested Citation

  • Piet Rietveld & Hans Ouwersloot, 2001. "On the distance dependence of the price elasticity of telecommunications demand; review, analysis, and alternative theoretical backgrounds," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 35(4), pages 577-594.
    • Handle: RePEc:spr:anresc:v:35:y:2001:i:4:p:577-594
    Note: Received: December 1999/Accepted: July 2001
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    JEL classification:

    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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