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AN ANALYSIS OF EQUILIBRIUM RELATIONSHIP BETWEEN PRICE ELASTICITY AND EXPENDITURE LEVEL: A CASE STUDY OF KOREAN MOBILE MARKET DATA

By Hongjai Rhee and Sangkyu Rhee

Abstract

In most developing countries, telecommunications industry has been grown fast and still has more growth potential than in the developed countries. Clearly the telecommunications industry contributes to foster economic developments and also to narrow the communication gaps among countries. Among many components relating to the success of quick developments of telecommunication services, an appropriate and optimal pricing strategies is the most vital element. In this view point, this paper examines the optimal price discrimination strategy for firms in a monopolistically competitive market. The primary interest is the theoretical relationship between price elasticity and the average expenditure level of consumers. Our equilibrium analysis shows that the relationship can go either way (positive or negative) depending on the prevailing price level of the product in concern. As an empirical example, using a hierarchical Bayes model we find that heavy user of mobile service are substantially more elastic to the price of calls in Korea. A discussion of the optimal pricing scheme and market structure is in order.Price Discrimination, Price Elasticity, Price Sensitivity, Mobile Telecommunications, Hierarchical Bayes Model

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