Network Externalities and Critical Mass in the Mobile Telephone Network: a Panel Data Estimation

Abstract

This paper develops a simple demand model with network externalities which allow us to identify the shape of the network externalities function in the mobile telephone market and to estimate the critical mass. If the mobile telephone network exhibits positive network externalities, we expect that the demand curve is not downward sloping everywhere but it has an increasing part, the critical mass of the installed base of subscribers. Once the critical mass is reached, the growth of the network is self-sustaining. We use a panel data of the 30 OEDC Countries from 1989 to 2006 for estimating the relationship between price of 3-minute cellular call and the installed base of subscribers; we find strong network externalities effects in mobile telephone market which drive the demand curve for this network good to be an inverted U function. Moreover, given that the concavity of the demand curve depends on the extent of network externalities, the idea is to identify some variables which could affect the intensity of network effects in the mobile telephone market, because the more concave the demand curve is, sooner the critical mass is reached for any price. This may have important implications for producers in terms of initial investment and marketing strategies which they have to do to attain the critical mass.Network Externalities, Mobile Telecommunication, Critical Mass