Price-elasticity of consumption demand of retirees and
pensioners in assessment of CLSU (net costs of
universal service)
November 2011
INDEX
1.
BACKGROUND ........................................................................................... 3
2.
METHODS OF ESTIMATING PRICE-ELASTICITY OF DEMAND .............. 6
2.1
ESTIMATION OF PRICE-ELASTICITY OF DEMAND USING DATA ON
ACTUAL USE.................................................................................................................... 7
2.2
ESTIMATION OF PRICE-ELASTICITY OF DEMAND USING SURVEY
DATA ............................................................................................................................. 11
2.3
ESTIMATION
OF
PRICE-ELASTICITY
OF
DEMAND
USING
"BENCHMARKING"........................................................................................................ 14
3.
CONCLUSIONS ......................................................................................... 17
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INDEX OF TABLES
Table 1 Examples of studies with estimates of price-elasticity of demand supported by
actual consumption data . ................................................................................................. 8
Table 2 Examples of studies with estimated price-elasticity of demand using data from
sample survey..................................................................................................................11
Table 3 Sensitivity to prices differences in the electronic communications sector in 2010 11
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1. BACKGROUND
By determination of 17.05.2007, ICP-ANACOM ordered PTC (with effect from
01.01.2007), within the scope of the universal service, to make a 50% discount on
network line rental available to retirees and pensioners subscribing to a single
analogue line, and likewise made PTC subject to the obligation to pass this discount
on with respect to WLRO accesses1 supporting services to customers fulfilling the
same conditions.
The same determination stipulated that the 50% discount on the line rental charge is
to be considered in the assessment of the net costs of universal service in electronic
communications (CLSU), as provided for in articles 95 and 96 of Law No. 5/2004 of 10
February2.
Accordingly, in its determination of 09.06.2011 on the methodology to be used for
calculating the CLSU, ICP-ANACOM (2011ab) subsequently provided the formula
below, to be used to obtain the additional annual net value resulting from the provision
of the discount offered to retirees and pensioners.
The following parameters are used in the formula:
a) CdRP - Costs associated with providing the discount to retirees and
pensioners;
b) NRPcd month n - Number of retirees and pensioners who receive the discount
in month n, including retirees and pensioners who receive this discount
through the WLRO;
c) ε - Demand-price elasticity of monthly access subscription charge;
d) Δ%P - Percentage variation in prices (currently the percentage change in price
is 100%);
1
Wholesale Line Rental Offer.
Provision of a 50% discount on the rental of the subscriber line to retiree and pensioner subscribers of a
single analogue line, whose combined household income does not exceed the national monthly minimum
wage, was originally established by Decree-Law no. 20-C/86 of 13 February (as amended by Decree-Law no.
18/2003 of 3 February), whereas, subsequent to approval of Law no. 53-A/2006 of 29 December (which
approved the 2007 state budget), Decree-Law no. 20-C/86 was repealed, whereby the State no longer
provided PTC with payment in consideration of the application of this discount.
2
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e) MSTF month n - Values of FTS monthly subscription charge applicable in
month n.
In the cited determination of 09.06.2011, it was also stated that the above calculation
should take into account the effect of demand-price elasticity, i.e., consideration should be
given to the number of retirees and pensioners who would disconnect from the FTS as
provided by PTC in the scope of the universal service, thereby ceasing to constitute a
burden for the respective provider, in the event that the discount was discontinued.
As such, it would be reasonable to assume that, in a scenario where the discount
associated with the FTS subscription is discontinued, a certain number of retirees and
pensioners would choose to stop receiving the service as provided by PTC; indeed this is
recognized by the company, which in a letter dated 13.02.2007 mentioned that the most
likely outcome of discontinuing the discount would be the disconnection "en masse" of
network lines by these customers.
Although it was not mentioned in the determination of 09.06.2011, in this same letter, PTC
stated that cancelling the discount offered to retirees and pensioners would have an
adverse affect on its image, which is a factor also warranting consideration in terms of
assessing CLSU.
To measure the effect of elasticity, ICP-ANACOM considered it appropriate (also in the
cited determination of 06.09.2011) to take into account the information that is held in
terms of elasticity, specifically as contained in a set of four studies (Cipallone and
Gambardella (1993)3; Mauleón (1991)4; Vodafone (2003)5 and Wheatley (2006)6). Since
these studies provide very different values of elasticity - likely due in great part to the fact
that these studies cover different countries with very different market conditions, in
different years - ICP-ANACOM opted to use a mean elasticity value (-0.295).
Given that the available values could not reflect, with full rigor, the reality at hand,
especially given the particular characteristics of retiree and pensioner customers, ICPANACOM decided (also in the cited determination of 09.06.2011) to conduct a study in
order to estimate this price elasticity.
3
With an FTS monthly subscription charge elasticity of -0.55.
With an FTS monthly subscription charge elasticity of -0.22.
5
With an FTS monthly subscription charge elasticity of between 0.02 and -0.1.
6
With an FTS monthly subscription charge elasticity of between -0.1 and -0.6.
4
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Accordingly, on 20.07.2011, ANACOM'S Board Support Department (DAC) received a
request from Board Member, Mr. Eduardo Cardadeiro, in order to ascertain the usefulness
and viability of this possible study.
The following sections of this document seek to
respond to this request.
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2. METHODS OF ESTIMATING PRICE-ELASTICITY OF DEMAND
The price-elasticity of demand can be defined as a change in the quantity of a product or
service consumed/demanded, following a change in the corresponding price (Marshall,
1890). As a rule7, increases in the price of a product or service tend to result in reduced
consumption, while price decreases tend to be followed by increases in consumption (of
course, within certain limits, including, in particular, related to diminishing marginal utility
of consumption and/or related to time available for consumption).
Generally the price elasticity of demand is classified according to the following levels:
a) Relatively elastic demand - where the percentage change in quantity consumed
exceeds the percentage change in price;
b) Unitary elastic demand - where the percentage change in quantity consumed
equals the percentage change in price;
c) Relatively inelastic demand - where the percentage change in quantity consumed
is less than the percentage change in price;
d) Perfectly elastic demand - when the percentage change in the quantity consumed
far exceeds the percentage change in price;
e) Perfectly inelastic demand - where the percentage change in the quantity
consumed remains constant, not reacting to the percentage change in price;
Several factors may contribute to affect the intensity of price-demand elasticity, including:
a) The existence of substitute products - for example, when analyzing the priceelasticity of demand for the fixed telephone service (FTS), it is useful to examine
the extent to which the FTS is a substitute of the mobile telephone service (MTS);
b) Disposable household income - a lower price of the product and frequency of
consumption, relative to disposable income, should reduce the intensity of price
elasticity of demand;
c) The necessity of the consumption - for example, if FTS access is seen as
absolutely essential by retirees and pensioners who need to be in more frequent
contact with health care services in emergency situations, it is possible that
demand from this group of customer will tend to be inelastic;
7
Except under conditions characteristic of certain "anomalies". For example, the "Veblen" effect is related to
certain "high-status" goods, which become more sought after when the price increases, such as luxury cars
and designer clothing. At the opposite extreme, the "Giffen" effect, explains that when certain goods
constituting predominant staple consumption by poorer people - e.g. bread - increase in price, poor
consumers no longer have money available to eat meat, so that they start eating more bread, even though the
price of bread has increased.
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d) Inertia of change - for example, consumers in more advanced age groups are
typically more conservative in their preferences and have greater inertia in
response to price changes, although in the case of retirees and pensioners with a
low level of disposable income, budgetary constraints may counteract this inertia.
Generally, and without going into detail (in this irrelevant context) on the various possible
methodological approaches for estimating the price-elasticity of demand, two methods are
commonly recognized as providing an estimate of this elasticity, one using historical data
on actual consumption for a particular product or service and the other supported by
survey data.
In the cited determination of 09.06.2011 and given the clear lack of information that could
be used to provide the estimate of elasticity according to the methods commonly used,
ICP-ANACOM presented another approach, estimating elasticity using "benchmarking",
i.e. using values reported in scientific papers and other documents.
2.1 ESTIMATION OF PRICE-ELASTICITY OF DEMAND USING DATA ON ACTUAL
USE
Use of actual consumption data in calculating the price elasticities of demand is quite
common, although it is sometimes difficult to obtain publicly available information for this
purpose, given the reticence of companies in sharing commercially sensitive or
confidential information.
Table 1 gives examples of such studies, covering markets, for example, such as the FTS,
MTS, the Internet access service, electricity distribution and forestry products.
When the price-elasticity of demand for a particular product or service is estimated using
actual consumption data, it is imperative that information is obtain on the historical data of
prices and quantities consumed for the same product or service, and also on other
variables relevant to determining demand, such as disposable income, price of substitutes
and complementary products, etc.
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Table 1 Examples of studies with estimates of price-elasticity of demand supported by actual
8
consumption data .
ARTICLE
INPUT
Actual consumption data, static: accesses and prices for monthly FTS
subscriptions in the USA in family dwellings eligible to receive subsidies,
as well as the characteristics of this service. Prices and characteristics of
Ackerberg et al (2009)
the service were obtained from the Beel Operating Company. Also
combines Census results on fixed telephone penetration and on
demographic characteristics, with more than 7 thousand exchanges.
Briglauer, Wolfgang et al Actual consumption data, dynamic (monthly between 2002 and 2007): on
(2011) the Austrian market, particularly on prices of voice services and on
potential substitute fixed services, such as mobile voice service, income
and dummy variables to detect seasonal effects.
Actual FTS consumption data, dynamic (annual between 1992 and
2004): income, investment, export growth, price of fixed telephone use,
price of mobile telephone, price of monthly subscription to mobile
Gyimah-Brempong and
telephone, external assistance, government consumption, Internet use,
Karikari (2007)
public fixed telephone penetration, percentage of the population on the
waiting list to have telephones and exchange capacity to connect with the
number of fixed telephone calls.
Inglesi-Lotz (2011)
Actual consumption data, dynamic (annual between 1980 and 2005):
electricity consumption, real average price of electricity and GDP.
Actual consumption data of electricity, dynamic (annual between 1980
Inglesi (2010) and 2005): Real GDP, real consumption of electricity, average wholesale
electricity prices, real disposable income and population.
Actual MTS consumption data, dynamic (monthly, between January 2002
and December 2006): pricing, tariffs and subscribers, interest rate, price
Karacuka et al (2011)
of telecommunications equipment, salary index, the Turkish population,
per capita GDP and base stations.
Manfrim and da Silva (2007)
Actual FTS consumption data, dynamic (monthly, from June 1999 to May
2005): Real GDP, impulses, tariffs and fixed accesses.
Mauleón (1991) Actual FTS consumption data.
Michinaka et al (2011) Actual consumption data, static, for forestry products.
Moghaddam and Parsa
Actual electricity consumption data.
(2011)
Neelakanta and Sardenberg
Actual Internet access service consumption data.
(2011)
8
Although not indicating concrete figures for the price-elasticity of demand, the study of Ramos et al (2010) is
of some interest in relation to differences in FTS adoption and consumption patterns between urban and rural
populations, using data such as the value of the monthly subscription charge, per capita income in urban
areas and in rural areas, cost of access in urban areas and in rural areas, time taken for installation in urban
areas and in rural areas, length of initial waiting lists in urban areas and in rural areas, total population,
percentage of population living in rural areas, population growth rate in urban areas and in rural areas and
initial cash balance.
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Vodafone (2003) Actual FTS and MTS consumption data.
Actual consumption data, dynamic (quarterly, from 3rd quarter 1999 to
4th quarter 2001): information from TNT service provider, to estimate
Ward and Woroch (2010) FTS and MTS demand. The database includes detailed information on
subscription to these services and the corresponding monthly billing, as
well as demographic characteristics.
Wheatley (2006)
Multiannual actual consumption data. The article includes a list of useful
variables for the study of price-elasticity in telecommunications.
In the case under review, and in line with the formula for calculating the additional net
annual value resulting from the provision of discounts offered to retirees and pensioners,
the following data would be required on a monthly basis:
a) Number of households benefiting from discounts (directly and indirectly through
the WLRO) and monthly volume of discounts actually granted;
b) Number of households benefiting from discounts (directly and indirectly through
the WLRO) and monthly volume of discounts actually granted to subscribers who
were not customers of PTC or of other providers prior to allocation of the discount;
c) Number of remaining households which are PTC customers and customers of
other FTS providers, which are not beneficiaries of the discount granted to retirees
and pensioners but which have a similar disposable income to retiree and
pensioner customers benefiting from the discount (disaggregated by age group);
d) Number of remaining households which are PTC customers and which are not
beneficiaries of the discount granted to retirees and pensioners but which belong
to a similar age group as the customers benefiting from the discount;
e) Total number of households in Portugal, disaggregated by income class and age
group.
Processing of this data enables estimation of:
a) The responsiveness of demand within the segment of retiree and pensioner
customers9, at a variation of FTS access prices;
b) The comparison between the demand for FTS access from (i) a group of retirees
and pensioners receiving the discount and (ii) a group of PTC customers not
9
Strictly speaking, and not so, it can be assumed that when holders of FTS subscription contracts reach
retirement age, where fulfilling the necessary conditions, they will apply immediately for the discount, whereby
a comparison is not being made between a group of retirees and pensioners with discounts and a group of
retirees and pensioners with no discount, but rather a group of citizens is being identified who, before retiring
or receiving a pension, were not FTS subscribers, but became so from the moment of retirement or being
pensioned, specifically due to the expectation of receiving applicable discount.
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receiving the discount, but with an income level similar to the group receiving the
discount10.
Additionally, beyond the actual price-elasticity of demand for access to the FTS,
consideration should also be given to the calculation of the cross price-elasticity of
demand between the FTS and MTS. This is because, even though retiree and pensioner
customers benefiting from the discount may stop being PTC customers as a result of a
discontinuation of the applicable discount, they might become MTS customers (or having
been MTS customers previously, increase their consumption) of a company (or
companies) belonging to Grupo PT, thereby benefiting Grupo PT with an increase in retail
revenues or wholesale revenues generated by interconnection traffic.
It is considered that the data currently available to ICP-ANACOM is severely imitated
given the information which appears would be necessary to calculate the price-elasticity of
demand based on actual consumption data.
In fact, according to the Market Regulation Department (DRM) on 21.07.2011, ICPANACOM has no data on the monthly number of:
a)
Beneficiaries of the discount granted to retirees and pensioners;
b)
Retiree and pensioner customers, whether beneficiaries of the discount or not;
c)
PTC Subscribers disaggregated according to their respective classes of income.
According to information determined internally, it is not known whether PTC has this
information and an assessment would have to be made of the proportionality of a request
for information of this nature, both as affects PTC and for ICP-ANACOM itself, given the
work and cost that might be involved.
It should also be noted that, even if PTC actually had such data available, it would be
necessary to consider its authentication, by means of prior auditing, given its likely
implications on the assessment of CLSU.
10
Whereas in the latter case, it would be necessary to consider control variables, such as, for example, the
average age of the subscriber, since retirees and pensioners may have more interest in remaining
permanently contactable at home, either for health reasons or for leisure reasons and due to a greater
willingness to occupy their free time with telephone conversations.
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2.2 ESTIMATION OF PRICE-ELASTICITY OF DEMAND USING SURVEY DATA
Another approach to calculating the price-elasticity of demand involves the development
of estimates using data from sample surveys. Table 2 shows two examples of such
studies covering markets such as MTS and electricity distribution to residential
consumers.
Table 2 Examples of studies with estimated price-elasticity of demand using data from sample survey
ARTICLE
INPUT
Dash and Kumar (2011) Survey sample: 85 MTS users
Survey sample: 1,375 residential electricity consumers, between April
Faruqui and Sergici (2011) and September 2008 and 912 residential customers between April and
August 2009.
Examples of questions that seek to enable analysis of consumer sensitivity with respect to
hypothetical price changes associated with electronic communications services can be
found in ECSI surveys conducted by ISEGI-UNL.
For example, the results of the ECSI 2010 (ISEGI-UNL, 2011) survey show that about
74% of FTS customers would be sensitive to FTS price changes (including subscription
charge and calls), while about 18% of FTS customers would not be (while 8.5% of
respondents either did not know whether they were sensitive to changes in price or did not
answer the question which would gauge such sensitivity).
Table 3 Sensitivity to prices differences in the electronic communications sector in 2010
FTS
MTS
TVS11
Fixed
Internet
Mobile
Internet
Communications
Sensitive to
price
differences
73.7
73.6
80.2
88.6
84.3
76.6
Not sensitive to
price
differences
17.8
21.7
13.4
6.3
7.2
17.4
Do not know /
No answer
8.5
4.6
6.4
5.1
8.4
6.0
Latent
Variables
Source: ECSI (2011)
11
Subscription television.
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However, these results are representative of FTS customers as a whole and are not
focused on the retiree and pensioner customers of PTC benefiting from the discount on
the monthly access subscription charge12.
Assuming, however, that the disposable income of PTC retiree and pensioner customers
benefiting from the discount on the monthly access subscription charge is substantially
lower than the average disposable income of the majority of FTS customers, it would
seem reasonable to assume that sensitivity to price changes in this group of customers
would, ceteris paribus, be higher than that manifested by FTS customers in general.
However, somewhat counter intuitively, the results available for the 2009 ECSI Survey
(ISEGI-UNL, 2010), point to the opposite situation. In this respect:
a)
From a set of 44 respondents13 who said they were retired (irrespective of whether
or not they were beneficiaries of the discount on the monthly access subscription
charge) and were FTS customers of PTC, about [sci14] [eci15]% responded by
saying that if a competing FTS provider reduced their prices (subscription charge
and calls) by at least 50%, they would switch from PTC to this competitor;
b) Whereas, of the remaining 196 respondents who said they were FTS customers of
PTC but were not retired, the proportion stating an intention to switch provider to a
FTS provider competing with PTC (if the latter reduced prices by 50%) was about
[sci] [eci]%;
c) Around [sci] [eci]% of retired customers of PTC and about [sci] [eci]% of nonretired PTC customers said they would not switch service provider, regardless of
size of the reduction in prices offered by the competing providers.
In any event, even while survey data was available on retiree and pensioner customers of
PTC benefiting from the discount, the question posed in the ECSI questionnaire did not
contribute directly to estimating the price-elasticity of demand among these customers,
since the focus of the ECSI questions is the declared intention to switch from the current
12
In previous years, the ECSI survey was sponsored by ICP-ANACOM and, therefore, disaggregated data
was made available on the distribution of respondents and responses by FTS provider, gender, age,
education level and economic situation (e.g. employed, unemployed, student, stay-at-home, retired and other
situations). In 2009 (ISEGI-UNL, 2010) and 2008 (ISEGI-UNL, 2009), following a request from ICP-ANACOM,
information was likewise included on the sensitivity of FTS clients with regard to MTS price changes and vice
versa.
13
Despite a possible valid statistical analysis (N>30), the number of retired respondents might be considered
limited in terms of providing a suitably resilient assessment.
14
Start of confidential information.
15
End of confidential information.
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FTS provider to any other FTS provider, given a price reduction of any provider. On the
other hand, for the purpose of estimating the price-elasticity of demand among PTC's
retiree and pensioner customers, it is the sensitivity of these customers that needs to be
gauged, in the light of an increase (rather than a decrease) in the monthly fees charged by
the customer's current provider and not changes by any other FTS provider.
Although, in strictly mathematical terms the ratio of FTS pricing between provider A and
provider B is calculated in the same way regardless of whether there has been a change
in the price charged by provider A or provider B, the same cannot be said in terms of
estimated perception, since individuals tend to react differently when they are questioned
on the basis of a positive change or negative change in prices (or quantities)16.
Therefore, to estimate the price-elasticity of demand using sample survey data, it would
be necessary to question, for each year from 2007 to 201117, a sample of retiree and
pensioner customers of PTC or of other service providers (direct or indirect beneficiaries
of the discount available to retired and pensioners) as to whether they would cease to be
FTS customers, in each of these years, in the event that the discount was discontinued.
It would also be relevant to ask, if, in the event this discount was discontinued, they
ceased to be PTC customers, whether the decision would be "instantaneous" or delayed
by a few months or, in extreme cases, years.
Posing questions of this type raises concerns about a variety of aspects that may severely
undermine the usefulness of a study on the price-elasticity of demand.
Firstly, there could be a very extended period elapsing between the time when the
potential respondents reported actual consumption (at the limit 2007) and the time when
they responded to the survey, and in these circumstances it is difficult for an 'average'
consumer to remember exactly to what extent they were disposed to stop being a PTC
customer in the event of a discontinuation of the applicable discount.
According to certain scientific doctrines (linked to the so-called theory of decadence), in
the case of retirees and pensioners, the acuteness of this problem would be increased,
16
An interesting example is that of penalty points applied to car drivers in case of traffic violations. In Italy,
unlike in many other countries, when the driver receives a driving license, a maximum number of points is
given, and points are subsequently deducted as offenses are committed. It works in this way because in Italy it
has been concluded that drivers' perceptions in terms of the deterrent effect of points is greater using this
system than if the driver were to start with zero points and accumulate points if offenses are committed.
17
Taking into account that, in its determination of 27.01.2011, ICP-ANACOM (2011c) decided that the CLSU
for the years 2001 to 2006 are unlikely to be considered as unfair burden.
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since with increasing age, the functioning of memory mechanisms tends to deteriorate,
impacting perception.
Secondly, the current social and economic situation is substantially different from the less
pessimistic economic climate that persisted until the end of 2009. It is therefore likely that
current perception will act, to a certain extent, as a "contaminant" of the memory of past
perception with regard to any decisions to disconnect FTS access.
Thirdly and obviously, only surviving FTS retiree and pensioner customers of the FTS can
be questioned. Since there seems to be some correlation between disposable income and
average remaining life expectancy, it is possible that the proportion of retirees and
pensioners who are now deceased, may have made up, in the majority, those, at the time,
with even lower levels of income and with greater price sensitivity. This raises further
questions as to what extent the potential respondents are representative of the universe of
retirees and pensioners benefiting from the discount for which PTC has requested CLSU
compensation.
Furthermore, the intention is to use the survey data to estimate, exclusively, the priceelasticity of FTS access demand, whereas, for the average end-user, it may be relatively
difficult to form separate perceptions related specifically to access and consumption of
calls, given that these services are very closely connected.
A possible alternative to conducting a survey based on a sample would be to conduct
interviews in a focus group. However, the problems already identified with regard to
sample surveys, would be exacerbated in this case by the fact that focus group
participants would be even less representative and any results would likely lack statistical
significance.
2.3 ESTIMATION OF PRICE-ELASTICITY OF DEMAND USING "BENCHMARKING"
The methodological approach adopted by ICP-ANACOM in its determination of
06.09.2011 can be improved to the extent that the estimated values for elasticity in each
of the studies were unrepresentative of the actual situation being examined - in particular
as reported for countries where the control variables have very different values to those
associated with Portugal, in respect of time periods different to those relevant to the case
under review, or since they cover the majority of subscribers and not a social group
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comparable to retirees and pensioners on low incomes - therefore it is certain that the
average of these unrepresentative values will also still be unrepresentative.
As such, it is considered that the study of Wheatley (2006), given its focus on developing
countries, does not appear to favour a level of comparability which is compatible with the
national reality, whereby the use of these results could likewise appear questionable.18
Likewise, it is important to be clear that ICP-ANACOM has not had access to the study of
Cipallone and Gambardella (2003), whereas reference is made to the corresponding
value of elasticity due to its mention in another study. In this case, as far as can be seen,
the study of Cipallone and Gambardella (2003) was not published in any scientific
publication. As such, the fact that this study has not obtained an appropriate level of
recognition in the scientific community appears to adversely affect its credibility.
The estimation methodology established in the determination of 09.06.2011 can be
returned to, but eliminating (given the reasons set out above) the results of the studies of
Wheatley (2006) and Cipallone and Gambardella (2003) and given the results of other
studies on the price-elasticity of demand for FTS access, which (while taking into account
their limitations in terms of comparability, as mentioned) may prefigure some
approximation to the national reality.
The works of Ackerberg et al (2009) and of Garbacz (1997), both conducted in the context
of analysing state programmes in the United States designed to drive take-up of the FTS
among households on low incomes, are of special interest, since the purpose of such
programmes is relatively similar to the purpose of the subsidy granted in Portugal to
retirees and pensioners. It is also useful to note the study of Briglauer et al (2011), which
looks at elasticities in the Austrian market.
Since, as stated by Vodafone (2003), there is an apparent downward trend in the value of
price-elasticity of demand over time, in the case of studies carried out using older data,
i.e., Vodafone (2003) and Mauleon (1991), it seems appropriate to assign a half weighting
to the corresponding results (0.125) as compared to the weighting given to the three
remaining set of results (0.25).
Taking the ranges of estimates of price-elasticity of demand for FTS access which appear
to be of interest in the context of the national reality in the three studies given
18
For the same reason, consideration is not given in this analysis to the results of a study of GyimahBrempong and Karikari (2007) which used panel data from several African countries, arriving at short-term
access elasticity values of 0.02 and long-term access elasticity of 0.42
15/22
consideration, the resulting midpoints correspond to -0.23 in Briglauer et al (2011), -0.016
in Ackerberg et al (2009) and -0005 in Garbacz and Thompson (2011)19. As follows from
the values presented in the determination of 09.06.2011, the midpoints of the estimate
ranges of price-elasticity of demand for access to be considered correspond to -0.22 in
Mauleón (1991) and -0.060 in Vodafone (2003). The weighted average of these midpoints
is -0.098.
19
As follows from the values shown in Table 5 of the article for "LIFELINEUP."
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3. CONCLUSIONS
From a conceptual point of view, it appears wholly appropriate to consider the effect of
price-elasticity of demand when calculating the additional net annual value derived from
the provision of discounts offered to retirees and pensioners.
In practical terms, however, the acute limitations in terms of the availability of relevant
historical data on actual FTS consumption, as well as other context variables, suggest
that, even while it remains possible to conduct a study on price-elasticity of demand
among PTC's retiree and pensioner customers using actual consumption, such a study
would have little validity.
Meanwhile, a study on the price-elasticity of demand among retiree and pensioner
customers of PTC using survey data would, likewise, be of limited usefulness, insofar as,
given a range of factors, and especially (a) the period of time elapsing between the time of
consumption and the time of conducting the survey; (b) the significant difference between
the current social and economic climate and the less pessimistic situation prevailing at the
time consumption occurred; (c) the potential shortcomings in the extent to which a sample
could be representative of the target universe; and (d) the difficulty which the average
consumer has in formulating a perception associated specifically with the price-elasticity
of demand for access, given the close and instrumental link between access and
consumption of calls, the credibility of such an exercise would be questionable.
Nevertheless, from a conceptual point of view, it is considered that this approach is
feasible in circumstances when the survey is used to estimate the current behaviours of
retiree and pensioner customers in the period during which the survey is actually
conducted.
As such, in this case and given the different types of limitations which have been
identified, and also given the inherent subjectivity of the results of the estimates and the
simultaneous requirement for robust results, it is not clear that conducting a study on the
price-elasticity of demand among retiree and pensioner customers would produce results
that are any more reliable than the results achieved through an approach based on
"benchmarking".
Therefore, following the methodology of "benchmarking" already identified in ICPANACOM determination of 09.06.2011, with the improvements suggested herein, a
weighted average is derived from the midpoints of the ranges of price elasticity of
demand. This method gives a value of -0.098, which is a result deemed more robust and
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methodologically more consistent than the one identified in the determination of
09.06.2010.
18/22
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