The Economics of Information, Communication, and Entertainment The Impacts of Digital Technology in the 21st Century James Alleman Áine Marie Patricia Ní-Shúilleabháin Paul N. Rappoport Editors Demand for Communications Services - Insights and Perspectives Essays in Honor of Lester D. Taylor The Economics of Information, Communication, and Entertainment The Impacts of Digital Technology in the 21st Century Series Editor Darcy Gerbarg, New York NY, USA For furthervolumes: http://www.springer.com/series/8276 James Alleman Áine Marie Patricia Ní-Shúilleabháin Paul N. Rappoport Editors Demand for Communications Services - Insights and Perspectives Essays in Honor of Lester D. Taylor 123 Editors James Alleman PaulN.Rappoport College ofEngineering and Applied Department of Economics Science Temple University Universityof Colorado—Boulder Philadelphia, PA Boulder, CO USA USA Áine MariePatricia Ní-Shúilleabháin Columbia InstituteforTele-Information Columbia BusinessSchool New York, NY USA ISSN 1868-0453 ISSN 1868-0461 (electronic) ISBN 978-1-4614-7992-5 ISBN 978-1-4614-7993-2 (eBook) DOI 10.1007/978-1-4614-7993-2 SpringerNewYorkHeidelbergDordrechtLondon LibraryofCongressControlNumber:2013951159 (cid:2)SpringerScience+BusinessMediaNewYork2014 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodology now known or hereafter developed. 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While the advice and information in this book are believed to be true and accurate at the date of publication,neithertheauthorsnortheeditorsnorthepublishercanacceptanylegalresponsibilityfor anyerrorsoromissionsthatmaybemade.Thepublishermakesnowarranty,expressorimplied,with respecttothematerialcontainedherein. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Contents Overview: The Future of Telecommunications, Media and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . ix Prologue I: Research Demands on Demand Research. . . . . . . . . . . . xv Prologue II: Lester Taylor’s Insights . . . . . . . . . . . . . . . . . . . . . . . xxv Part I Advances in Theory 1 Regression with a Two-Dimensional Dependent Variable. . . . . . . 3 Lester D. Taylor 2 Piecewise Linear L1 Modeling . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Kenneth O. Cogger Part II Empirical Applications: Information and Communication Technologies 3 ‘‘Over the Top:’’ Has Technological Change Radically Altered the Prospects for Traditional Media? . . . . . . . . . . . . . . . 33 Robert W. Crandall 4 Forecasting Video Cord-Cutting: The Bypass of Traditional Pay Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Aniruddha Banerjee, Paul Rappoport and James Alleman 5 Blended Traditional and Virtual Seller Market Entry and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 T. Randolph Beard, Gary Madden and Md. Shah Azam v vi Contents 6 How Important is the Media and Content Sector to the European Economy?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Ibrahim Kholilul Rohman and Erik Bohlin 7 Product Differences and E-Purchasing: An Empirical Study in Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Teresa Garín-Muñoz and Teodosio Pérez-Amaral 8 Forecasting the Demand for Business Communications Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Mohsen Hamoudia 9 Residential Demand for Wireless Telephony . . . . . . . . . . . . . . . . 171 Donald J. Kridel Part III Empirical Applications: Other Areas 10 Pricing and Maximizing Profits Within Corporations . . . . . . . . . 185 Daniel S. Levy and Timothy J. Tardiff 11 Avalanche Forecasting: Using Bayesian Additive Regression Trees (BART) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Gail Blattenberger and Richard Fowles Part IV Evidenced Based Policy Applications 12 Universal Rural Broadband: Economics and Policy. . . . . . . . . . . 231 Bruce Egan 13 Who Values the Media? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 Scott J. Savage and Donald M. Waldman 14 A Systems Estimation Approach to Cost, Schedule, and Quantity Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 R. Bruce Williamson Part V Conclusion 15 Fifty Years of Studying Economics . . . . . . . . . . . . . . . . . . . . . . . 291 Lester D. Taylor Contents vii 16 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 Áine M. P. Ní-Shúilleabháin, James Alleman and Paul N. Rappoport Appendix: The Contribution of Lester D. Taylor Using Bibliometrics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Biographies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 Overview: The Future of Telecommunications, Media, and Technology Introduction This book grew out of a conference organized by James Alleman and Paul Rappoport,conductedon10October2011inJacksonHole,Wyoming,inhonorof the work of Lester D. Taylor. The conference lasted just one weekend, but the papers are more durable.1 We begin with two Prologues; the first is written by Eli M. Noam. He focuses on demand analysis for media and communication firms. He notes that demand analysisintheinformationsectormustrecognizethe‘publicgood’characteristics of media products and networks, while taking into account the effects of interdependent user behavior; the strong cross-elasticities in a market; as well as the phenomenon of supply creating its own demand. Noam identifies several challenges. The first involves privacy concerns (since companies do not want to share their data). In addition, research and analytical data collection are falling behind. Third is the demonstrable lack of linkage of economic with behavioral data. The fourth major hurdle consists in the lack of bridges from the academic world of textbook theory involving consumer demand to the practical empirical world of media researchers. The second Prologue by Timothy Tardiff and Daniel Levy focuses more narrowly on Lester Taylor’s body of work, in particular its practical applications and usefulness in analyses of, and practices within, the ICT sector. The remainder of this book is divided into four parts: Advances in Theory; Empirical Applications; Evidence-Based Policy Applications; and a final Conclu- sion. The contents of these Parts are discussed in detail below. The book closes with an Appendix by Sharon Levin and Stanford Levin detailing the contributions of Professor Taylor using Bibliometrics. Ordinarily, Festschrifts only have contributions by the honoree’s students and followers;however,thisbookisblessedbytwocontributionsbyProfessorTaylor. 1 Thanks are due to the Columbia Institute for Tele-Information (CITI), as well as to the InternationalTelecommunicationsSociety(ITS)forsponsorship.ThanksarealsoduetoMohsen Hamoudia(forsponsorshiponbehalfoftheInternationalInstituteofForecasters(IIF));Centris, andtheauthorsforarivetingsetofpapersassummarizedabove,andascollectedherein/below. ix x Overview:TheFutureofTelecommunications,Media,andTechnology The first is a seminal contribution to demand estimation when log–log transformations are inappropriate because of the existence within the data set of negative values. The second, serving as part of the Conclusion, provides insight into economics from Taylor’s fifty-plus years in the field. Advances in Theory Lester Taylor develops a procedure for dealing with variables which cannot be transformed into the traditional log–log in regression models. Rather, he suggests representing such dependent variables in polar coordinates. In this case, two- equationmodelscanbespecifiedwithestimationproceedingintermsoffunctions involving sines, cosines, and radius vectors. Taylor’s approach permits general- izationtohigherdimensions,andcanbeappliedincircumstancesinwhichvalues of the dependent variable can be points in the complex plane. Kenneth Cogger demonstrates how piecewise linear models may be estimated withtheL1criterion(whichminimizesthesumofabsoluteerrors,asdistinctfrom theordinaryleastsquares(OLS)criterion).HeintroducestheQuantileRegression program,usingMixedIntegerLinearProgramming.IfanOLSprogramisdesired, a Mixed Integer Quadratic Programming approach may prove useful. Empirical Applications: Information and Communication Technologies Robert Crandall investigates the impact of recent changes in the Telecommuni- cation, Media, and Technology (TMT) sector on participants in the traditional mediasector.Hefocusesonempiricalevidenceonhowchangesinequipmentand access to media have affected consumers’ time management. He examines the effects of the profound changes taking place in the TMT sector on the economic prospectsofthevarietyoffirmsengagedintraditionalcommunicationsandmedia. Crandall demonstrates that while market participants may currently recognize the threats posed to traditional media companies, the disruptions have been relatively modest thus far—and have had little apparent effect on the financial market’s assessment of the future of media companies. AniruddhaBanerjee,PaulN.Rappoport,andJamesAllemanreportoneffortsto forecast the effect of consumer choices on the future of video cord-cutting. This chapter presents evidence on household ownership of OTT (Over the Top)- enablingdevicesaswellassubscriptiontoOTTservices;thispaperalsoforecasts the effects of both phenomena upon traditional video. This chapter also examines how consumers’ OTT choices are determined by household geo-demographic characteristics, device ownership, and subscription history. Ordered logit regres- sions are used to analyze and forecast future choices of devices and services, and Overview:TheFutureofTelecommunications,Media,andTechnology xi to estimate switching probabilities for OTT substitution by different consumer profiles. T.RandolphBeard,GaryMadden,andMd.ShahAzamfocusuponanalysisof blended ‘bricksandclicks’firms,aswell asonvirtualfirmslacking anypresence offline. Their study utilizes a data set of small Australian firms, and examines the relationship between the strategic motivation for entry, and the results of entry. Utilizing abivariate ordered probitmodel with endogenousdummy variables, the endogeneityoffirmstrategicgoalsandimplicitestimatesoftheparametersofthe post-entry business is analyzed. Their study finds that the goal of the firm materially affects subsequent performance: firms entering to expand their market size ordinarily succeed, but those entering to reduce costs do not. Blended firms enjoy no strong advantages over pure online entrants. Ibrahim Kholilul Rohman and Erik Bohlin focus upon the media and content sub-segments of the Information and Communication Technology (ICT) sector— asdefinedbytheOECD—andintandemwiththeISICclassificationofthesetwo components. The media and content sector—by these definitions—consists of the printing industry, motion pictures, video and television, music content, games software,andonlinecontentservices.Theauthorsaimtomeasurethecontribution of the media and content sector in driving economic output in the European economies,andtodecomposethechangeofoutputintoseveralsources.Thispaper aims to forecast the impact of a reduction in price on national GDP. The main methodology in this study is the Input–Output (IO) table. The study reveals that thepriceelasticityofmediaandcontentsectorstoGDPisapproximately0.17%. The impact varies across countries, but France, Sweden, and Norway were found to have the higher elasticity coefficients. It found that price reductions mainly affects the financial sector, together with manufacturing of ICT products besides the media and content sectors themselves. Teresa Garín-Muñoz and Teodosio Pérez-Amaral demonstrate key determi- nantsofonline shoppinginSpain.Theymodelhow socio-demographicvariables, attitudes, and beliefs toward internet shopping affect both the decision and usage of online shopping. In this chapter, three different samples of internet users are definedasseparategroups:thosewhopurchaseonline(buyers);thosewholookfor information online but purchase in stores (browsers); and those who do not shop online at all (non-internet shoppers). Logit models are used to select the useful factors to assess the propensity to shop online. Donald J. Kridel focuses upon residential demand for wireless telephony as it continues to grow at a dramatic rate. His chapter analyzes the residential demand for wireless telephony using a sample of surveyed US households. Using a large data set with over 20,000 observations, Kridel estimates a discrete-choice model for the demand for wireless telephony. Preliminary elasticity estimates indicate that residential wireless demand is price-inelastic. Daniel S. Levy and Timothy J. Tardiff focus upon pricing and maximizing profits within corporations. Their chapter addresses examples of how particular businessesestablishpricesandimproveprofitability.LevyandTardifffocusupon issues identified in Lester Taylor’s research such as theoretical and practical