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We present an empirical model of households' choices among local telephone service options (for example, between flat-rate and measured service) and the interrelation of these choices with the number and average duration of local calls households make at each time of day to each geographical zone. Using a nested logit model with estimation performed on a randomly selected subset of the households' calling patterns, we calculate elasticities of demand for each local service option, number of calls, average duration, and revenues with respect to the fixed monthly charges and the usage charges for calling under each option. We find moderate price elasticities of number of calls with respect to usage charges for households subscribing to measured service. Nevertheless, raising usage charges has a negligible effect on revenues, since a sufficient number of households either originally subscribe to flat-rate service or convert to flat-rate service in response to higher usage charges. We find a high elasticity of demand for each service option with respect to its fixed monthly fee. This indicates high substitutability among service options. The shift among service options induces new calling patterns, which we find to be a small but not negligible indirect effect.
Train et al. (Thu,) studied this question.