On Price Elasticities of International Telecommunication Demand

In this empirical study, the price elasticity of the demand for telecommunication between Sweden and six destination countries, Germany (FRG), United Kingdom, USA, and the three Scandinavian countries Denmark, Finland, and Norway, is investigated. A linear regression model in logarithmic transforms of all variables is specified. To allow for time-varying regression coefficients the moving local regression technique is used to estimate the trajectory of the coefficients. The results of our study can be summarized as follows. For all countries except the USA, the (absolute) price elasticity increases over the observation period 1976–1990. The US price elasticity is close to zero, whereas the demand is relatively price elastic for the European countries. Our analysis shows that a model with constant price elasticities would be misleading when observations over a longer time period are analyzed. An appropriate method of analysis is suggested.