Telecommunications demand and pricing structure: An econometric analysis

The main objective of this paper is to analyse residential demand by traffic destination, using a translogarithmic indirect utility function. We focus on five traffic directions, in order to construct a model adapted to evaluate the characteristics of telecommunications demand in a competitive market. The resulting price elasticities express high reactivity to own price changes for the main traffic directions, as well as little interactions between the different types of traffic. Moreover, the high values of income elasticities confirm the importance of income effects when analysing residential telecommunications demand. This model shows useful for welfare analysis. The computation of customers' income equivalent variation shows, on average, a higher willingness to pay for some traffic directions than the bill actually paid. Finally, we show that the optimal prices for the operator, in a cost minimisation point of view, are higher than the observed prices for local and national traffic directions. This emphasises the existence of important cross-subsidies among the different segments of customers.