Quantifying the Consumer Surplus from Smartphones

Abstract

Quantifying the consumer welfare of smartphones is important in understanding the new innovation's overall benefit to the economy. I empirically estimate consumer surplus from smartphones and explore the market and policy implications of the welfare estimates. I employ newly available Korean panel survey data, which contain detailed information on individuals' digital device usage. The data capture the adoption trajectory of smartphones from its onset. I develop and estimate a model of consumer demand for digital activities, allowing the set of activities to change as a function of the individual's smartphone ownership and physical location. The model allows me to quantify the overall consumer surplus from smartphones, how it varies across demographic groups, and how much of it results from the substitution effect or the expansion, effect. I find that the average monthly consumer surplus per person is $41, where $23 is the surplus from expansion, such as checking emails or searching for information online while commuting. The consumer surplus estimate is highest for individuals aged 20-30, who indeed constitute the group that adopted smartphones the most. Overall, the total consumer surplus from smartphones in Korea is approximately $49 million per day. I explore the market and policy implications of my estimates through counterfactual exercises. I find that providing free WiFi at public transportation locations in Seoul increases consumer surplus by $117 million per year, which substantially exceeds the annual budget allocated by the government to provide the service.