This study estimates national telephone subscription demand equation for Korea using panel data technique. The data set used in this study consists of annual observations for the 15 Korean provinces.
The results show that basic fee, income level, and trend variable have statistically significant effect on telephone penetration. The elasticity of penetration rate with respect to income level shows the highest level of elasticity, followed by usage rate and basic fee. Elasticity with respect to basic fee, which is -0.046, is similar to that of the US. Elasticities for usage rate and income level were higher than those in the US.
It is not statistically significant to conclude that the coefficients in the demand equations are different among the 15 Korean provinces, but it is so when compared between city area and provincial area. When comparing the elasticity of penetration rate with respect to basic fee, city area showed higher absolute value of elasticity than provincial area.
Analyzing the elasticities shows that under the condition that the revenue of the service provider is unchanged, the current trend in highering the basic fee and lowering the usage rate has a positive effect on raising the overall penetration rate, but carrying out cross subsidization between people in different areas for the sake of offering equal access to telephone service has a negative effect.