Price Elasticities for Local Telephone Calls

Abstract

Price elasticities are estimated for telephone calls and minutes of conversation using data from a experiment in central Illinois conducted by General Telephone and Electronics. The experiment charges separately for calls and for minutes. Using a model that is consistent with the theory of telephone demand, the authors estimate the effects of both prices. The nonlinear generalized least squares estimates of the elasticities are fairly small-about 0.1 or less in absolute value at experimental price levels-but they are estimated with high precision. The report briefly considers the application of these results to predict the effects of introducing measured service telephone rates in other cities. RESIDENTIAL TELEPHONE SUBSCRIBERS in the United States typically pay a flat monthly rate for with no extra charge for calls within the area. The alternative of explicitly charging for calls, commonly referred to as usage-sensitive pricing or local measured service, is of increasing interest to U.S. telephone companies and regulatory commissions (Cosgrove and Linhart [5]; Garfinkel and Linhart [8]; Baude, ed. [2]).3 Charging for calls that are now free clearly holds promise of increasing economic efficiency (Alleman [1]; Mitch