SUBSTITUTABILITY BETWEEN MOBILE AND FIXED TELEPHONES: EVIDENCE AND IMPLICATIONS FOR INDIA

Substitutability between mobile and fixed phones has become an important consequence of telecom sector deregulation in India since 1991. This paper estimates the socio‐economic determinants of household demand for mobile and fixed phones, and tests for substitutability between mobile and fixed phones, based on a binary logit model and using a small sample survey data from the Karnataka State in South India. The results show that the nature and magnitude of determinants are different between mobile and fixed phones. Estimated cross price elasticity offers empirical evidence for substitutability rather than complementarity between fixed and mobile phone services. This evidence is symmetric in mobile and fixed phone models. The empirical results are shown to have implications for policy discussion on subsidization by the Access Deficit Charge and bases for Universal Service Obligation. In view of rapid changes in the telecom market, a periodic nationally representative survey may be necessary to generalize the conclusions and implications of this paper.