Estimating consumer surplus in the Korean mobile phone service market

Abstract

The objective of this research is to estimate the consumer surplus resulted from the increased demand for the mobile telecommunication service in Korea from 1996 to 2001. In Korea, we had seen drastic increase in the subscribers for the mobile telecommunication service in late 1990s. This research adopted the simple and effective method introduced by Alexander, et al. (2000): estimating consumer surplus by dividing sales by 2 times the price elasticity of demand. The subscription demand and the call demand are estimated with variables such as the number of accumulated subscribers, subscription charge, fixed fee, usage fee, the price of a substitute, and income. Regression analysis provides the price elasticity of the mobile call service: -2.28 for the subscription demand and -1.04 for the call demand. With those values, the consumer surplus is estimated to be 12.982 trillion won from 1996 to 2001. The consumer surplus from the network externality effect, which is very important characteristic of the mobile telecommunication service, is measured, too. The option externality, which is not internalized in the subscription demand, is estimated to be 0.37 trillion won when the RGF is 1.3 to 0.865 trillion won when the RGF is 1.7. The comprehensive consumer surplus is the sum of the consumer surplus from the subscription demand and the call demand and the consumer surplus due to the network externality effect. The comprehensive consumer surplus from January 1996 to December 2001 ranges from 13.353 trillion won to 14.219 trillion won. One implication that can be derived from the consumer surplus estimation is that the handset subsidy seems to have played a significant role in expanding subscription demand.