An Empirical Analysis of Cellular Demand in South Africa

This paper provides some estimates of demand elasticity for prepaid cellular voice and short message service (SMS) in South Africa by fitting a structural discrete consumer choice model to a cross-sectional data set on Vodacom customers collected in 2005. We find higher price elasticities than those typically reported for developed countries. Although consumers attach a higher value to communications during (highly priced) peak hours than off-peak, the elasticity is twice as high in peak hours. In relative terms, demand for communications during peak hours is more elastic for urban than for rural consumers and the reverse holds for demand during off-peak hours. The highest valuations are attached by rural consumers to communications placed during working hours. These results suggest that, while, in terms of access to cellular, South Africa has gone a long way into bridging the gap between the first and second economies, in terms of usage of cellular service, giving investors incentives to expand their networks in rural areas is expected to yield substantial social welfare gains. Whether South African market and regulatory institutions will succeed in meeting this challenge remains to be seen