Welfare effects of introducing competition in korean mobile telecommunications services

Abstract

This paper empirically examines by estimating consumer surplus and producer surplus in economic concepts how introducing competition in Korean mobile telecommunication services (MTS) has affected the social welfare. The Korean mobile telecommunications market has rapidly grown since 1997 when competition was introduced into the market. In particular, with a continuous decrease in service price, both consumers and service operators have realized tremendous welfare gains. First, estimated consumer surplus through estimating the price-elasticities of demand reached $15.1 billion during 1996~2001. The consumer surplus has radically increased since competition was introduced into the market. The results also show that consumer surplus is closely related to elasticity change of subscription demand and calls demand. Secondly, using service providers`` financial reports, estimated producer surplus ranged from -$0.8 billion to -$2.4 billion. After introducing competition producer surplus had shown negative growth until the end of 1999 because mobile operators had a huge investment and expense for establishing network equipment and gathering new subscribers. Lastly, total social welfare, during the time period of this research was estimated at $12.7 billion~$14.3 billion, and it particularly showed a rapid increase after the introduction of competition. It was concluded that consumers had greatly benefited from competition among mobile operators, while mobile operators had not made a profit, except for the incumbent operator, until the end of 2001. However, producer surplus will be expected to grow more than consumer surplus as operators will get a return on investment.