Quantifying the Benefits of Entry into Local Phone Service

Joint with: Nicholas Economides and V. Brian Viard

In this paper, we evaluate the consumer welfare effects of entry into residential local phone service in New York State using household-level data. Since residential local phone service is sold under a menu of two-part tariffs, we develop a method for estimating a mixed discrete/continuous demand model. The econometric model incorporates the simultaneity of the discrete plan and continuous consumption choices by consumers and allows for flat rate plans, bundling of services, and unobservable firm quality. Since utility maximization underlies our model, we are able to estimate welfare effects from the introduction of additional choices or changes of product features. We use the model to evaluate the effect of entry by the two largest competitive local exchange carriers in the New York market from the third quarter of 1999 to the first quarter of 2003. Residential local phone service competition is an important goal of the 1996 Telecommunications Act and we provide one of the most detailed evaluations of its effect on consumer welfare. Our preliminary results indicate that relative to what it would have paid to Verizon, the average household switching to AT&T or MCI saved 4.3% and 0.7%, respectively, ignoring quantity and observed and unobserved quality effects from switching.

For more information, contact Jere Behrman.