Effects on consumer demand patterns of falling prices in telecommunication

Abstract

The relentless technological change in telecommunication industry is forcing down many of the cost elements of a telephone call. Already, the marginal costs of the use of telecommunication networks are so low that these services could, in reality, be almost free of charge. The technological change, together with increased competition in the sector, will therefore represent a strong force towards decreasing marginal prices of telecommunication services. This technological change will have consequences for the demand for other goods and services. Especially important are probably the effects on the demand for traditional transport services. This paper uses a consumer demand model of the Norwegian economy to analyse these consequences. The model simulations indicate that the falling prices in the telecommunication industry will multiply the demand for telecommunication while consumers expenditure on telecommunication will be approximately constant. The demand for traditional transport will be reduced, and in particular so for luxurious transport modes as air transport (with high Engel elasticity), and less so for transport by bus and rail (with low Engel elasticities). The reductions in the demand for use of private cars and for boat transportation are larger than the reductions in the demand for bus and rail, but less than the reductions in air transport.