Crowding out or Complementarity in the Telecommunications Market?

There is a substantial number of cases where the a priori relationship between products is not at all clear in the sense that although apparent to be clear substitutes may turn out to be in fact complements, or vice-versa. This paper aims to study the relationship between …xed and mobile telephony in the United Kingdom and, in particular, address the question if mobile communications crowded out …xed telephony or if, on the other hand, the two types of communications are in fact complements. We estimate a structural continuous-choice demand model following Pinkse et al. (2002), Pinkse and Slade (2004), and Slade (2004) and we …nd that at the current di¤usion stage, …xed and mobile communications appear to be complements. Given that the model is micro-founded, we also address the question of how the evolution of the price di¤erential between the two types of communication may, respectively, a¤ect the welfare of consumers and …rms. We …nd that the continuation of these price trends have substantial welfare bene…ts for subscribers and at the same time have no signi…cant impact on the pro…ts for …rms. Finally, we present some economic policy implications, especially about the need to (de)regulate telecommunications provision. JEL Classi…cation: C13, D12, L51, L96 Keywords: Telecommunications, Mobile, Fixed, Demand, Substitution, Complementarity We thank the NET Institute www.NETinst.org for …nancial support. Ricardo Ribeiro gratefully acknowledges …nancial support from the Fundação para a Ciência e a Tecnologia. ySTICERD, The London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK; Tel: +44 20 7955 6690; Fax: +44 20 7955 6951; Email: [email protected]. zFaculdade de Economia, Universidade Nova de Lisboa, Campus de Campolide, 1099-032 Lisboa, Portugal; Tel: +351 21 3801 600; Fax: +351 21 3870 933; Email: [email protected].