Telecommunications Demand Function and the Optimal Pricing Schedule Based on Demand Externalities

Abstract

This paper aims at the estimation of telecommunications demand function and the derivation of the optimal pricing schedule for the service. While having vast studies on telecommunications demand worldwide, we have very few in Japan. It is because telecommunications services were supplied monopolistically and because telecommunications traffic data were not open in Japan. The traffic data have been offered since 1990, which are not sufficient for time series analysis. The only cross section analysis was made by Yamazaki, Imagawa and Mitomo in 1992. We extend their pioneer work to improve some deficiencies of it.
Demand externalities are conspicuous in telecommunications. When a new telecommunications system is to be set up, even an establishment that feels it convenient and is willing to subscribe will not do so alone. It will either subscribe with others simultaneously or agree to subscribe in anticipation of others joining. It is obvious that there is an intricate linkage between tariff, the volume of communication and the size of subscriber set. Our model has succeeded in addressing these relationships and incorporating the externalities as a distinct feature.
We propose two approaches for the modeling of demand founction; the macro-base and micro-base approaches. The former is based on the aggregated data of traffic and pays no attention to the behavior of each economic establishment. Although an empirical estimation is easy, it is not sufficient for further analysis because the externality cannot affect the consumption nor subscription level. The latter is based on heterogeneous subscribers and the mechanism of generating the demand externality is endogenous. The model is rather complicated, but it is easy to apply it to the optimization and welfare analysis.
The both types of demand function are estimated empirically. The optimal pricing schedule is derived using the latter type of demand function.