IDEAS home Printed from https://ideas.repec.org/p/esm/wpaper/esmt-07-001.html
   My bibliography  Save this paper

Estimating network effects and compatibility in mobile telecommunications

Author

Listed:
  • Michal Grajek

    (ESMT European School of Management and Technology)

Abstract

I develop a structural demand model for mobile telephone service, which facilitates the identification of network effects and compatibility between networks. Network effects are measured by the dependence of consumer willingness to pay on the installed base of subscribers. Compatibility is measured by the relative extent of cross- and own-network effects. I then estimate the model using quarterly panel data from the Polish mobile telephone industry from 1996-2001 and find strong network effects and—despite full interconnection of the mobile telephone networks—low compatibility. I also show that ignoring network effects leads to an overestimation of elasticity of demand.

Suggested Citation

  • Michal Grajek, 2007. "Estimating network effects and compatibility in mobile telecommunications," ESMT Research Working Papers ESMT-07-001, ESMT European School of Management and Technology.
  • Handle: RePEc:esm:wpaper:esmt-07-001
    as

    Download full text from publisher

    File URL: http://static.esmt.org/publications/workingpapers/ESMT-07-001.pdf
    File Function: Full text (original version)
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Assar Lindbeck & Sten Nyberg & Jörgen W. Weibull, 1999. "Social Norms and Economic Incentives in the Welfare State," The Quarterly Journal of Economics, Oxford University Press, pages 1-35.
    2. Ernst R. Berndt & Robert S. Pindyck & Pierre Azoulay, 2003. "Consumption Externalities and Diffusion in Pharmaceutical Markets: Antiulcer Drugs," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 243-270, June.
    3. Okada, Yosuke & Hatta, Keiko, 1999. "The Interdependent Telecommunications Demand and Efficient Price Structure," Journal of the Japanese and International Economies, Elsevier, pages 311-335.
    4. Liikanen, Jukka & Stoneman, Paul & Toivanen, Otto, 2004. "Intergenerational effects in the diffusion of new technology: the case of mobile phones," International Journal of Industrial Organization, Elsevier, pages 1137-1154.
    5. Lee, Jongsu & Kim, Yeonbae & Lee, Jeong-Dong & Park, Yuri, 2006. "Estimating the extent of potential competition in the Korean mobile telecommunications market: Switching costs and number portability," International Journal of Industrial Organization, Elsevier, pages 107-124.
    6. Schoder, Detlef, 2000. "Forecasting the success of telecommunication services in the presence of network effects," Information Economics and Policy, Elsevier, vol. 12(2), pages 181-200, June.
    7. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    8. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, pages 1109-1116.
    9. Andreas Stephan, 2001. "Regional Infrastructure Policy and its Impact on Productivity: A Comparison of Germany and France," CIG Working Papers FS IV 01-02, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    10. Granovetter, Mark & Soong, Roland, 1986. "Threshold models of interpersonal effects in consumer demand," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 83-99, March.
    11. Bardhan, Pranab, 1987. "Alternative Approaches to the Theory of Institutions in Economic Development," Department of Economics, Working Paper Series qt4t97z6v6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    12. Cabral, Luis M. B., 1990. "On the adoption of innovations with 'network' externalities," Mathematical Social Sciences, Elsevier, vol. 19(3), pages 299-308, June.
    13. Farrell, Joseph & Saloner, Garth, 1986. "Standardization and variety," Economics Letters, Elsevier, vol. 20(1), pages 71-74.
    14. Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science.
    15. Klemperer, P., 1992. "Competition when Consumers Have Switching Costs: An Overview," Economics Series Working Papers 99142, University of Oxford, Department of Economics.
    16. Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, pages 160-170.
    17. Christopher R. Knittel & Victor Stango, 2003. "Compatibility and pricing with indirect network effects: evidence from ATMs," Working Paper Series WP-03-33, Federal Reserve Bank of Chicago.
    18. Fu, W. Wayne, 2004. "Termination-discriminatory pricing, subscriber bandwagons, and network traffic patterns: the Taiwanese mobile phone market," Telecommunications Policy, Elsevier, pages 5-22.
    19. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, pages 633-645.
    20. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
    21. Ahn, Hyungtaik & Lee, Myeong-Ho, 1999. "An econometric analysis of the demand for access to mobile telephone networks," Information Economics and Policy, Elsevier, vol. 11(3), pages 297-305, September.
    22. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, pages 93-115.
    23. Economides, Nicholas & White, Lawrence J., 1994. "Networks and compatibility: Implications for antitrust," European Economic Review, Elsevier, vol. 38(3-4), pages 651-662, April.
    24. Hatanaka, Michio, 1974. "An efficient two-step estimator for the dynamic adjustment model with autoregressive errors," Journal of Econometrics, Elsevier, pages 199-220.
    25. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, pages 940-955.
    26. 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, pages 304-322.
    27. Heli Koski & Tobias Kretschmer, 2004. "Entry, Standards and Competition: Firm Strategies and the Diffusion of Mobile Telephony," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(1), pages 89-113, November.
    28. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, December.
    29. Bousquet, Alain & Ivaldi, Marc, 1997. "Optimal pricing of telephone usage: An econometric implementation," Information Economics and Policy, Elsevier, vol. 9(3), pages 219-239, September.
    30. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    31. Gruber, Harald & Verboven, Frank, 2001. "The diffusion of mobile telecommunications services in the European Union," European Economic Review, Elsevier, pages 577-588.
    32. Joseph Farrell and Nancy T. Gallini., 1986. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," Economics Working Papers 8618, University of California at Berkeley.
    33. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 125-132.
    34. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, December.
    35. Klemperer, P., 1992. "Competition when Consumers Have Switching Costs: An Overview," Economics Series Working Papers 99142, University of Oxford, Department of Economics.
    36. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, pages 1627-1647.
    37. Gandal, Neil, 1995. "Competing Compatibility Standards and Network Externalities in the PC Software Market," The Review of Economics and Statistics, MIT Press, pages 599-608.
    38. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, pages 651-666.
    39. H. Leibenstein, 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 64(2), pages 183-207.
    40. Blonski, Matthias, 2002. "Network externalities and two-part tariffs in telecommunication markets," Information Economics and Policy, Elsevier, vol. 14(1), pages 95-109, March.
    41. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, Oxford University Press, pages 673-694.
    42. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, pages 117-131.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lechman, Ewa, 2014. "The ‘technological take-off’ and the 'critical mass'. A trial conceptualization," MPRA Paper 59506, University Library of Munich, Germany.
    2. Ching-I Huang, 2008. "Estimating demand for cellular phone service under nonlinear pricing," Quantitative Marketing and Economics (QME), Springer, pages 371-413.
    3. Duso, Tomaso & Gugler, Klaus & Yurtoglu, Burcin, 2010. "Is the event study methodology useful for merger analysis? A comparison of stock market and accounting data," International Review of Law and Economics, Elsevier, pages 186-192.
    4. Chesney, Thomas & Chuah, Swee-Hoon & Hoffmann, Robert, 2009. "Virtual world experimentation: An exploratory study," Journal of Economic Behavior & Organization, Elsevier, pages 618-635.
    5. Heli Koski & Tobias Kretschmer, 2004. "Entry, Standards and Competition: Firm Strategies and the Diffusion of Mobile Telephony," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(1), pages 89-113, November.
    6. Daniel Birke, 2009. "The Economics Of Networks: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 762-793, September.
    7. Rasch, Alexander, 2017. "Compatibility, network effects, and collusion," Economics Letters, Elsevier, vol. 151(C), pages 39-43.
    8. Hulisi Ögüt & Asunur Cezar & Merve Güven, 2015. "An Empirical Analysis of Demand for Mobile Services in Turkey," Working Papers 937, Economic Research Forum, revised Sep 2015.
    9. Zulima Fernández & Belén Usero, 2007. "The erosion of pioneer advantage in the European mobile telecommunications industry," Service Business, Springer;Pan-Pacific Business Association, pages 195-210.
    10. Jean-Michel HUET & Isabelle VIENNOIS & Pierre LABARTHE & Anas EL BARKANI, 2012. "Impact Study of the Arrival of a New Mobile Phone Operator in Haiti," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(86), pages 175-192, 2nd quart.
    11. Doganoglu, Toker & Grzybowski, Lukasz, 2007. "Estimating network effects in mobile telephony in Germany," Information Economics and Policy, Elsevier, vol. 19(1), pages 65-79, March.
    12. Michal Grajek & Tobias Kretschmer, 2007. "Usage and diffusion of cellular telephony, 1998-2004," ESMT Research Working Papers ESMT-07-003, ESMT European School of Management and Technology.
    13. Usero, Belén & Fernández, Zulima, 2009. "First come, first served: How market and non-market actions influence pioneer market share," Journal of Business Research, Elsevier, vol. 62(11), pages 1139-1145, November.
    14. Miko?aj Czajkowski & Maciej Sobolewski, 2011. "Measuring network effects in mobile telecommunications markets with stated-preference valuation methods," International Journal of Management and Network Economics, Inderscience Enterprises Ltd, pages 197-215.
    15. Miko?aj Czajkowski & Maciej Sobolewski, 2011. "Measuring network effects in mobile telecommunications markets with stated-preference valuation methods," International Journal of Management and Network Economics, Inderscience Enterprises Ltd, pages 197-215.
    16. Mikołaj Czajkowski & Maciej Sobolewski, 2013. "Switching Costs and Network Effects – How Much Do they Really Matter in Mobile Telecommunications?," Working Papers 2013-29, Faculty of Economic Sciences, University of Warsaw.
    17. Laura Rinaldi, 2008. "Estimation of network externalities and critical mass in the mobile telephone market: a panel data analysis of the OECD countries," Working Papers 1_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    18. Pagani, Margherita & Fine, Charles H., 2008. "Value network dynamics in 3G-4G wireless communications: A systems thinking approach to strategic value assessment," Journal of Business Research, Elsevier, vol. 61(11), pages 1102-1112, November.
    19. Czajkowski, Mikołaj & Sobolewski, Maciej, 2013. "Estimation of switching costs and network effects in mobile telecommunications in Poland," 24th European Regional ITS Conference, Florence 2013 88515, International Telecommunications Society (ITS).
    20. Baraldi, A. Laura, 2008. "Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation," MPRA Paper 13373, University Library of Munich, Germany.
    21. Grajek, Michal & Kretschmer, Tobias, 2009. "Usage and diffusion of cellular telephony, 1998-2004," International Journal of Industrial Organization, Elsevier, pages 238-249.
    22. Grajek, Michal & Kretschmer, Tobias, 2009. "Usage and diffusion of cellular telephony, 1998-2004," International Journal of Industrial Organization, Elsevier, pages 238-249.

    More about this item

    Keywords

    Structural Econometric Model; Network Effects; Compatibility; Mobile Telecommunications;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:esm:wpaper:esmt-07-001. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ESMT Faculty Publications). General contact details of provider: http://edirc.repec.org/data/emstbde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.