Measuring Telecommunication System Network Effects

The idea that adding new subscribers to a telecommunications network increases the value of subscription to individual subscribers, or network effect, has attracted much interest in the network economics literature. (1973), (1974) and (1975) pioneered formal theoretical analyses of the welfare implications of such network effects. In particular, (1973) demonstrated the public good dimension of networks. (1974) extends the analysis to derive a demand function containing telephone price as an argument. However, difficulty in formulating structural demand models that incorporate network effects meant that few empirical studies provide evidence of the magnitude of network effects. However, (1983) estimates the value of the telephone service for different sized local calling areas and density of telephone main stations per square mile. Further, (1990) report evidence of a network effect using arguments similar to (1983). Following (1995), (2002), 2004 and (2004) estimate a network effect based on a structural model consistent with optimizing consumer behavior for individual telecommunications services.