Fixed-Mobile Substitution and the

Promotion of Universal Service

Glenn A. Woroch

University of California at Berkeley

Universal Service PolicyMeets Mobile Ubiquity

Should mobile access be counted toward the goal of universal service?

Should subsidies for fixed service be reduced or eliminated?

Should mobile access be subsidized in certain markets, e.g., rural areas?

►Answers depend on fixed-mobile substitution

Lifeline Program

Targeted subsidy to promote telephone access Federal program implemented by 50 states. Discount off monthly phone bill set by FCC, states.

Eligibility Income test: HH income below threshold based on

Federal Poverty Guidelines. Program test: HH participates in a federal assistance

program (Medicaid, SSI, etc.). HH must “self certify” each year.

Lifeline Program

Implementation Eligible Telecommunications Carries (ETCs)

implement through billing. Discounts range $6.75-$14.78 with an average of

$11.00 Composed of federal SLC ($6.75), plus state match,

plus federal 50% match (up to $1.75). Only one fixed/mobile line covered per household.

Participation ~19 million eligible but only ~6 million participate. Overwhelmingly on fixed not mobile.

Lifeline Programs Across States

State

State + federal

discountAvg annual

discount

Income eligibility as

% of FPG

Estimated participation

rate

% of households participating

% of sample households with Lifeline

California $12.00 $128.32 150% 119.2% 27.79% 32.88%

Florida $12.00 $130.21 125% 13.5% 2.12% 5.4%

Illinois $10.85 $94.40 125% 9.0% 1.26% 3.8%

Maine $12.00 $130.13 130% 99.2%

Massachusetts $14.50 $160.96 175% 28.4% 6.77% 15.11%

Michigan $9.75 $103.92 150% 20.1% 3.74% 3.62%

New Jersey $6.75 $69.62 150% 5.9% 0.95% 4.26%

New York $10.74 $115.87 150% 34.6% 8.31% 14.48%

Ohio $6.75 $76.81 150% 19.9% 3.76% 5.15%

Pennsylvania $10.50 $110.92 150% 5.5% 1.03% 2.48%

Texas $12.00 $121.19 125% 18.6% 3.5% 1.68%

U.S. Total/Average $121.97 30.7%

Household Panel Dataset

TNST’s ReQuest® Market Monitor household panelNationwide, 30K+ per quarter, 10 quarters

(3Q99-4Q01).Survey responses and demographics.

TNST’s Bill Harvesting® databaseFixed and mobile “bill harvesting” (~ 25%

response rate).Not a panel but some re-sampling (~ 10% of

bill submitters).

Lifeline Participation

Identified by service designation on household fixed line bill.

Lowest income group participation rate ~30%, gradually falls with income to 2% for highest group.

Lifeline also related to: Marital Status Size of household Composition of household Ages of children

Lifeline Participation by Income

0%

5%

10%

15%

20%

25%

30%

35%

Perc

ent o

f Sam

pled

Hou

seho

lds

Lifeline-Mobile DecisionHousehold income, size, state

Eligibility

Awareness

LL participation

Household education, mobility, carrier switching

LL subsidy AccessChoice

Fixed-Mobile Cross-Price Effects

Lower fixed charges of Lifeline could elicit cross price effect on mobile subscription

But the Lifeline “experiment” is not random Might mobile response to lower fixed price be an

“income effect”? Controlling for income & demos, wish to see

fixed price effect of Lifeline on mobile Check if Lifeline has an incremental effect on HH

purchase of cable, personal, Internet to see if it is a “pure price effect”

Empirical Problems

Errors arise in measuring fixed and mobile prices.

Self selection into Lifeline program. Unobserved household characteristics.

► All likely correlated with determinants of mobile subscription decision.

Solutions

Re-sampling of householdsControls for time-invariant characteristics

Instrumental variablesPurges prices of common unobservable

household factors Two stage estimation

Regress fixed and mobile bills on instrumentsProbit choice model of cellular subscription on

fitted prices

Cross Elasticity Estimates

Base Model

Low Income

(<$20k)

High Income

(>$20k)

Complete Sample 1.42 1.88 1.06

Without Mobile Phone Initially

1.79 1.97 1.62

With Lifeline Currently

1.73 2.17 0.83

Never Lifeline 1.58 -0.22 1.85

Cross Elasticities (cont’d)

Complete Participation

States*

Partial Participation

States

No Mobile Lifeline States**

Mobile Lifeline Allowed

Complete Sample

0.92 1.39 2.35 1.19

Without Mobile Phone Initially

0.85 2.03 3.03 1.72

With Lifeline Currently

0.08 2.06 2.43 1.62

Never Lifeline -0.53 1.72 10.37 1.46

* - California and Maine; ** - California, Illinois, New York

Two Policy Experiments

1. Withdraw the Lifeline discount from all participating households

2. Impose the average Lifeline discount on all non-participating, eligible households

Policy Simulation

Experiment

Target Population Base Case

Mobile

Change

Withdraw Lifeline

Current Participant 20.4% +9.8%

Expand Lifeline

No Lifeline, Income < 20k 14.3% -4.5%

Conclusions Mobile ubiquity presents challenges to the

design of universal service programs. Modification, or elimination, of existing subsidies

turns on accurate measure of fixed-mobile substitution.

A key universal service program, Lifeline, provides a natural experiment to estimate FMS.

After correcting for endogeneity problems, cross elasticities of access demand are quite large.

Simulation of expansion/contraction of Lifeline confirms that mobile subscription significantly impacted by fixed subsidies.