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Quantifying the Benefits of Entry into Local Phone Service

In this paper, we evaluate the consumer welfare effects of entry into residential local phone service in New York State. Residential local phone service competition was an important goal of the 1996 Telecommunications Act. We provide a detailed evaluation of its effects on consumer welfare using household-level data on service choices from the third quarter of 1999 to the first quarter of 2003. Our results indicate that as a result of entry households that subscribe to one of the entrants' services gain on average an equivalent of $2.33 per month in overall welfare from local telecommunications services, or 6.2% of the households' average bill. Averaged across all households including those that remain with the incumbent, households gain the equivalent of $0.83 per month, although benefits vary dramatically across households. Since residential local phone service is sold under a menu of nonlinear tariffs, we develop a method for estimating a mixed discrete/continuous demand model. The econometric model incorporates the simultaneity of the discrete plan and continuous consumption choices by consumers. We allow for flat-rate plans, bundling of services, and unobservable firm quality. Taking advantage of the detailed nature of the data, we decompose the households' overall gains from entry and find that benefits due to firm differentiation and new plan introductions exceed those from price effects.

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File URL: http://www.stern.nyu.edu/networks/Local_Telecommunications.pdf
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Paper provided by NET Institute in its series Working Papers with number 07-38.

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Length: 49 pages
Date of creation: Oct 2007
Date of revision: Oct 2007
Handle: RePEc:net:wpaper:0738
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Chiang, Jeongwen & Lee, Lung-Fei, 1992. "Discrete/continuous models of consumer demand with binding nonnegativity constraints," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 79-93.
  2. Zolnierek, James & Eisner, James & Burton, Ellen, 2001. "An Empirical Examination of Entry Patterns in Local Telephone Markets," Journal of Regulatory Economics, Springer, vol. 19(2), pages 143-59, March.
  3. Peter J. Danaher, 2002. "Optimal Pricing of New Subscription Services: Analysis of a Market Experiment," Marketing Science, INFORMS, vol. 21(2), pages 119-138, February.
  4. Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics 0303006, EconWPA.
  5. Kenneth E. Train & Daniel L. McFadden & Moshe Ben-Akiva, 1987. "The Demand for Local Telephone Service: A Fully Discrete Model of Residential Calling Patterns and Service Choices," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 109-123, Spring.
  6. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  8. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  9. 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.
  10. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
  11. Hendel, Igal, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 423-46, April.
  12. Shane Greenstein & Michael Mazzeo, 2006. "THE ROLE OF DIFFERENTIATION STRATEGY IN LOCAL TELECOMMUNICATION ENTRY AND MARKET EVOLUTION: 1999-2002 -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(3), pages 323-350, 09.
  13. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
  14. Stefano DellaVigna & Ulrike Malmendier, 2006. "Paying Not to Go to the Gym," American Economic Review, American Economic Association, vol. 96(3), pages 694-719, June.
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