Evidence on Mobile Phone Price Elasticity’s: The Cost of Alternatives

Using a Vodacom cross-sectional data set on 6 936 individuals collected in May 2005 in South Africa, Gasmi, Invaldi and Recuero Virto (2008) develop a structural demand-and-supply structural model based on the multinomial specification that investigates voice and SMS prepaid communications. Their findings reveal high price elasticity’s in the range of -2 to -6, typically higher than those found in developed countries. All consumers attach the largest valuation to peak hours (or working hours) but since these hours are highly priced, demand for peak hours is significantly more elastic than for off-peak hours (or leisure time). Indeed, both for urban and rural consumers and for voice and SMS, price elasticities for off-peak hours are on average -1, while for peak hours, this number is on average -3. At the time of the survey Vodacom’s prepaid prices for peak voice and SMS communications more than doubled those applied during off-peak hours.

At first sight, price cuts on prepaid services could be rewarding both for consumers and for the firm (peak hours). For rural areas networks, close to full capacity, it would be necessary to verify that the increase in revenues would be sufficient to cover incremental investments on base stations. In addition, this research suggests that reducing the gap between urban and rural economies, calls for investment in networks in rural areas since the usage in these regions appears to support economic activity with high value and relative low elasticity attached to working hours. This can be explained through the cost of alternatives in rural areas. A Vodafone study on cellular users in Tanzania and South Africa illustrates this idea, where 50 per cent to 70 per cent of respondents claimed that their cellular phones led to large savings in travel time and cost.

Source: Gasmi, F. and Ivaldi, M. and Recuero Virto, L., 2008, “An Empirical Analysis of Cellular Demand in South Africa,” IDEI Working Papers 531, Institut d’Économie Industrielle (IDEI), Toulouse.