copyright © 2010, All rights reserved eStudy.us Changing Long Distance Michael Roberson Feb. 27, 2012

copyright © 2010, All rights reserved eStudy.us Introduction For decades Long Distance was priced by per minute usage Marginal Cost of Long Distance Local phone companies expecting to enter the long distance market in 1996 as access charges drop Looking for market differentiation near zero 28¢ Access charges ranged from 6 to 18 cents in 1994 (Knittel, 1997)

copyright © 2010, All rights reserved eStudy.us Flat Rate Monthly Pricing provides subscribers access to unlimited calling, any time of day, any number of calls, and any length of message each month for a one time monthly recurring fee need to develop a demand model that correctly predicts consumer behavior as per minute rates go to zero

copyright © 2010, All rights reserved eStudy.us Model Specification Suppose a random utility function based on theory defined by Thurstone (1927) and McFadden (1974, 1981)

copyright © 2010, All rights reserved eStudy.us Model Specification

copyright © 2010, All rights reserved eStudy.us Model Specification Writing the equation in probabilistic from or

copyright © 2010, All rights reserved eStudy.us Model Specification Now the equation in probabilistic equation becomes

copyright © 2010, All rights reserved eStudy.us Model Specification Price Minutes of Use Bill Savings Value of stimulated usage q1q1 p 0 = current long distance price per minute q 0 = current minute of use q 1 = minute of use when per minute price is zero i th consumer demand p0p0 q0q0 0 Change in consumer surplus

copyright © 2010, All rights reserved eStudy.us Model Specification For observed utility Showing the difference in utility between choices

copyright © 2010, All rights reserved eStudy.us Model Specification Now estimate minutes of use by equation

copyright © 2010, All rights reserved eStudy.us Model Specification Find consumer surplus by integrating the demand function and evaluating results at per minute price equal 0 and current levels.

copyright © 2010, All rights reserved eStudy.us Model Specification Find the change in minutes of use with Calculate change in consumer surplus using

copyright © 2010, All rights reserved eStudy.us Model Specification Back to the choice task

copyright © 2010, All rights reserved eStudy.us Model Estimation The choice equation was estimated using the likelihood function

copyright © 2010, All rights reserved eStudy.us Model Estimation for logit

copyright © 2010, All rights reserved eStudy.us Data Collection The survey described the plan to each participant Then exposed each participant with a flat rate long distance fee and recorded intent to subscribe last the survey collected consumer specific demographic information The sample was stratified to include more high usage users thus assuring an adequate sample of participants likely to purchase the service.

copyright © 2010, All rights reserved eStudy.us Estimated model parameters VariableParameterStandard Error Demand Curve: Constant Demographic One Demographic Two Current Usage Behavior Choice: Constant Net Flat Rate Plan Benefit Current Telephone Usage Behavior Demographic Three Measure of Long Distance Bill Variability Demographic Four LLF # Observations0000

copyright © 2010, All rights reserved eStudy.us Results Estimated model parameters were used in pricing scenarios to simulate the market

copyright © 2010, All rights reserved eStudy.us Simulation Assumptions Survey participants received an intensive description of the flat rate long distance plan. Competition in the long distance market remains stable. Projections are long-term in nature. Projections are based on stated rather than revealed preferences.