How Much is an Incoming Message Worth? Estimating the Call Externality

A feature of electronic communication markets is that a consumer's decision to join or use a communications network can generate two effects on other users of the network: a network externality and a call externality. The former effect is defined as the benefit that users receive when a new subscriber joins the network (an expanded customer base can now be reached). The existence and magnitude of this effect is important from both theoretical and policy points of view. As a consequence, its empirical importance in various network markets has been documented in the literature. A call externality is defined as the benefit that a consumer derives when receiving a message (e.g. call) from another user, and it plays a crucial role both in the equilibrium predictions of theories of network competition and in the results of recent empirical work; however, as opposed to the network externality, no attempt has been made to quantify its empirical importance. In this paper I report results of a study designed to elicit and estimate the call externality. The data were generated using a stated-preference choice experiment designed to match theory and several characteristics of the mobile industry in Ecuador. To enhance the external validity of the results, the choice experiment was administered to over 2,500 individuals using 492 different internet-equipped government-run locations throughout the country. I find that call externalities are quite important in this market, but that their intensity depends heavily on the type of call (on-net v. off-net) as well as on the type of user (pre-paid v. post-paid). The call externality parameter for on-net calls is estimated at 0.67, while the significance of the call externality for off-net calls is significantly smaller (economically and statistically). Further, I find that the existence of call externalities in the market are mostly driven by pre-paid users.