How Much is an Incoming Message Worth? Estimating the Call Externality

Abstract

A feature of electronic communication markets is that a consumer’s decision to join or use a communications network can generate two effects on other users of the network: a network externality and a call externality. The former effect is defined as the benefit that users receive when a new subscriber joins the network (an expanded customer base can now be reached). The existence and magnitude of this effect is important from both theoretical as well as policy points of view; as a consequence, its empirical importance in various network markets has been documented in the literature. A call externality is defined as the benefit that a consumer derives when receiving a message (e.g. call) from another user, and it plays a crucial role both in the equilibrium predictions of several theoretical models of network competition as well as for the results of recent empirical work; however, as opposed to the network externality, no attempt has been made to quantify its empirical importance. This paper reports the results of a study designed to elicit and estimate consumers’ valuation of incoming calls (measured as the ratio between the marginal utility of an incoming call with respect to the marginal utility of an outgoing call – a value that is, theoretically, bounded between zero and 1) in the mobile industry in Ecuador. The data was generated using a stated preference choice experiment designed to match theory as well as several characteristics of the industry in this country. To enhance the external validity of the results, the choice experiment was administered to over 2,500 individuals using 492 different internet-equipped government-run locations spread throughout the country. My main finding is that call externalities are quite important in this market, but that its intensity depends heavily on the type of call (on-net v. off-net) as well as on the type of user (pre-paid v. post-paid). The call externality parameter for on-net calls is estimated at 0.67 while the call externality for off-net calls is significantly smaller and often statistically insignificant. Further, I find that the existence of call externalities in the market are mostly driven by pre-paid users as the parameter ceases to be important when post-paid users are excluded from the estimation.