The Effect of Prices on Fixed and Mobile Telephone Penetration: Using Price Subsidies as Natural Experiments

34 Pages Posted: 23 Aug 2009 Last revised: 21 May 2012

See all articles by Michael R. Ward

Michael R. Ward

University of Texas at Arlington - College of Business Administration - Department of Economics; ZEW, Mannheim

Glenn Woroch

University of California, Berkeley; Compass Lexecon; Georgetown Center for Business & Public Policy

Date Written: August 21, 2009

Abstract

This paper makes use of a natural experiment performed by a low-income price subsidy program, Lifeline Assistance, to estimate consumer substitution between fixed and mobile service. Variability across states and time in the Lifeline discount and the program’s eligibility requirements aids in identification. Using a large, nationwide household dataset that includes both billing details and demographic information, we measure mobile subscription differences between households receiving the subsidy and those that do not participate. Adopting a differences approach, we estimate access cross-price elasticities in the range 0.25 to 0.31, confirming substitution between the two access services and consistency with other published estimates. Simulations using the estimated mobile subscription models point to limited impact of changes in Lifeline participation on mobile penetration. We further rule out that the response to the price subsidy is an income effect by showing that household consumption of other similar products and services are not affected. We also find that high-income households have cross-price effect not significantly different from low-income households suggesting our results may apply to be broader population. Nevertheless, we find evidence that Lifeline participation is endogenous. To correct for potential bias, we exploit the re-sampling that exists in our dataset. A difference-in-differences analysis of the sub-panel shows little change in estimates of Lifeline’s effect on mobile subscription from our cross-sectional analysis. We do find asymmetry in responses to Lifeline participation depending on whether households added or lost Lifeline between re-samplings. These estimates have implications for reform of Universal Service policy as well as for the degree of consumer fixed-mobile substitution.

Keywords: Universal Service, access demand, fixed-mobile substitution, natural experiment

JEL Classification: D12, H24, L88, L96

Suggested Citation

Ward, Michael Robert and Woroch, Glenn, The Effect of Prices on Fixed and Mobile Telephone Penetration: Using Price Subsidies as Natural Experiments (August 21, 2009). Information Economics and Policy, Vol. 22, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1459075 or http://dx.doi.org/10.2139/ssrn.1459075

Michael Robert Ward (Contact Author)

University of Texas at Arlington - College of Business Administration - Department of Economics ( email )

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ZEW, Mannheim ( email )

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Glenn Woroch

University of California, Berkeley ( email )

Department of Economics
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HOME PAGE: http://elsa.berkeley.edu/~woroch/

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Georgetown Center for Business & Public Policy ( email )

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HOME PAGE: http://cbpp.georgetown.edu/

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