Two-sided Market Effect in Lithuanian Mobile Communications Market

Abstract

The paper deals with the activity of Lithuanian mobile communications operators in the context of two-sided market. One knows that value of goods and services grows with an increasing number of people using them. There are products that are used in conjunction with other products at the same time. The latter, when used alone, are almost worthless. Buyers who use these products make up networks. In these networks user utility grows logging in new users. The market characterized by this feature is called a network market and its positive effect of consumption is network externality.

Network externality is the situation when consumer utility by good consumption increases with the number of other agents consuming the good or in other words network externality is the increase of net value of action resulting from the growth of the same number of users performing that action. In economic literature generally considered products where network externality can occur are: fax machines, telecommunication networks, credit cards, computer hardware and software, etc. There are two types of network externality: direct and indirect. The direct network externality is generated by the consumption of the same product. The indirect network externality occurs when product value is added by a growing number of substitutions. A good example of this kind is computers and their software. This effect is often called a hardware-software paradigm.

The indirect network externality is related to minimum two markets. One, that is exposed to influence and the other (or others) that exposes. In economic literature it is possible to find the term cross-network externality.

It is argued that this externality occurs between mobile calls and cellphone sales in the context of two-sided market. One side is cellphone calls and the other is cellphones. It is argued that the profit decline on the cost of subsidizing cellphones is offsetted by an increase in profits from sales of calls. So, this method helps to increase the demand for cellphone calls. This article presents the theoretical model of a two-sided market in a mobile communications area. The conditions of subsidization that is used in order to increase net profit are determined.

The research of Lithuanian mobile calls demand is made. The main data sources of the study are reports on the electronic communications sector released by The Communications Regulatory Authority of the Republic of Lithuania (data concerning subscribers, calls’ prices and quantities) and United States Department of commerce Bureau of Economic Analysis (relates to price index of computers and peripherals). The main results of this estimation are introduced. The study shows that mobile calls’ demand does not depend on the sales of cellphones and that subsidization of cellphones does not stimulate the sales of mobile calls. Lithuanian operators use this subsidization only as a marketing tool in order to acquire bigger market share.

DOI: http://dx.doi.org/10.5755/j01.ee.23.1.1225