Abstract
This paper explores the role of network effects in the consumer’s choice of mobile phone operators in the UK. It contributes to the existing literature by taking a new approach to testing for direct network effects and by using individual-level data, which allows to analyse the impact that the immediate social network has on consumer choice in network markets. For our empirical analysis we use two sources of data: market-level data from the British telecommunications regulator OFCOM and micro-level data on consumers’ usage of mobile telephones from the survey, Home OnLine. We estimate two classes of models which illustrate the role of network effects. The first is an aggregate model of the comparative volume of on-net and off-net calls. This finds that the proportion of off-net calls falls as mobile operators charge a premium for off-net calls, but even in the absence of any price differential between on-net and off-net, there is still a form of pure network effect, where a disproportionate number of calls are on-net. The second is a model of the individual consumer’s choice of operator. This finds that individual choice shows considerable inertia, as expected, but is heavily influenced by the choices of others in the same household. There is some evidence that individual choice of operator is influenced by the total number of subscribers for each operator, but a much stronger effect is the operator choice of other household members.
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Notes
See Valletti and Cave (1998) for an analysis of the UK market from 1985 to 1998 and more background information.
The other two important operators today are Virgin, which started at the end of 1999 and uses T-Mobile’s network and “3” which started in 2003 and is building up its own 3G-network. At the end of our study period, Virgin had over half a million subscribers, but accounted for less than 2% of the market.
Note that this holds for subscriber market shares. Although there has been a similar trend in revenue market shares, Vodafone still boasts the highest revenue, as its customers generate a higher average revenue per user (ARPU).
Socio-economic group (MRSCODE) can take on values from 1 (AB) to 5 (E) with 5 being the lowest group.
Off-net calls are calls made to other mobile networks. Landlines are not included in the analysis.
We might however expect this ratio to depend on quality—for example, if the reliability of on-net calls is higher than the reliability of off-net calls. As we will argue later, reliability is comparable across networks.
It can be expected that smaller operators gain least by having large price differences between on- and off-net calls, as this would deter consumers from choosing these (smaller) networks. Indeed, when entering the UK market, “3” heavily advertised that there is no difference between on- and off-net calls for some of their tariffs. For the time considered in this study, there is no new entrant into the GSM market and consequently our assumption seems tenable.
A third possibility to reduce total call expenses would be to reduce the length and/or frequency of calls to persons using a different network. This is only a relevant choice factor if this adoption process is not the same for every communication partner. For simplicity, we assume that this process does not affect operator choice.
PRICE gives an indication of the price level of different operators as calculated by OFCOM. However, in reality consumers face a large variety of different price plans targeted at different consumer types and different usage behaviour. The PRICE variable therefore might have a relatively low signal to noise ratio.
Data on network coverage and international roaming are taken from the trade journals What Cellphone and What Mobile.
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We are grateful to Hilary Anderson from OFCOM, the Institute for Social and Economic Research, University of Essex, the ESRC Data Archive and Nicoletta Corrocher for help with data. We are also grateful to Chris Easingwood, Gautam Gowrisankaran and Francesco Lissoni, as well as participants at the Schumpeter Society conference in Milan, Italy and seminar participants at Manchester Business School, Chimera and the University of Nottingham for helpful comments. Daniel Birke would like to acknowledge financial support from the University of Nottingham Business School and the ESRC. The analysis is conducted using the econometrics package STATA.
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Birke, D., Swann, G.M.P. Network effects and the choice of mobile phone operator. J Evol Econ 16, 65–84 (2006). https://doi.org/10.1007/s00191-005-0001-5
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DOI: https://doi.org/10.1007/s00191-005-0001-5