1/31/2005

Mexico Tests Elasticity in Telecommunications.

In the article, by Anthony Harrup, the Mexican government has lost income because people are using more “mobile to mobile” phone calls. The government has implemented a plan to increase revenue by lowering the rate for “fixed to mobile” phone calls. Over the coming years, this plan will increase the elasticity for the “fixed” good. Since mobiles and fixed phones are substitute goods, this new act will give the public more of a reason to make “fixed to mobile” calls. Is lowering the price of an inferior good going to increase revenue? I believe by increasing elasticity, the volume of calls will go up, and the government will eventually see a profit. http://www.smartmoney.com/news/ON/index.cfm?story=ON-20050106-001086-1800.

3 comments:

Mack said...

I don't know if land lines would be considered inferior to moble phones, but they are deffinantly substitutes. If rates were lowered on land lines as a whole then more people would get one. If you change the rate between land lines and moble phones it could encourage people to get the moble phone and they would loose money.

sandy said...

I think there are some other factors in demand for mobile phones besides price. Convenience, for example, is something a fixed phone can't match, at least not yet. You can take your mobile phone with you. Secondly, how do the citizen's of Mexico feel about the government making money off of the phone calls they make? I know I spitefully increase my usage of e-mail everytime the price of postage increases.

Dr. Tufte said...

-1 for an unlinked URL (waived)

It isn't correct to say that this will do anything to elasticity.

If the government is viewing this as a revenue raiser, then my guess is that they have some estimates suggesting that the demand for these calls is (price) elastic.

I am not sure if it is correct that the fixed lines are an inferior good. If they are, it is possible for the government's strategy to backfire: making the calls cheaper will make everyone feel richer, and then they may just make more cellphone calls.

As to Sandy's comment about the money going to the government, it is very common in other countries for the phone company to be a government owned monopoly. Part of the reason that cellphones ever became popular was that they were cheaper and offered higher quality service than the government's "lazy monopoly".