Estimating Demand for Cellular Phone Service Under Nonlinear Pricing

Abstract

Cellular phone carriers typically offer complicated nonlinear tariffs. Consumers make a discrete choice among several rate plans. Each plan has a nonlinear price schedule, and price is usually lower for in-network calls. I present an empirical framework to estimate demand under such nonlinear pricing schemes by using parsimonious data and apply the estimation method to analyze the cellular phone service market in Taiwan. Based on the estimated model, I evaluate the impacts of termination-based pricing schemes on the market structure. While the existence of in-network discounts causes considerable tipping effects on market shares, the effects come primarily from reducing the average prices, not from the difference between in-network and off-network prices. There is no evidence showing that termination-based pricing by itself has significant effects on market structure.

Keywords: Termination-based price discrimination, optional rate plans, cellular phone service, structural estimation

JEL Classification: C35, L11, L15, L96