MOBILE PHONES: HOW CONSUMERS CHOOSE THEIR OPERATOR
Students who are friends are more than twice as likely to have the same mobile phone operator as two randomly picked students. That is one of the findings of new research by Daniel Birkeand Professor Peter Swann. This tendency to coordinate choice of mobile operator is particularly true foroverseas students, who have to choose an operator when they arrive in the UK, and who tend tohave many friends of the same nationality. Coordination also happens within families: Italian students, for example, strongly coordinate with their mothers though not with their fathers.
This research has implications for both mobile phone companies and competition policy. Especially for larger mobile phone companies, charging different prices for on- than off-net calls can be an effective way to gain higher margins or higher market share. And targeting different ethnic groups can be a good marketing strategy
How do consumers choose their mobile phone operator? The researchers wanted to find out if consumers coordinate their choiceof mobile phone operator with their friends to reduce the cost of calls. They find that this is the case if operators charge different prices for calls to the same network and calls to other networks.
Their work shows that social network analysistechniques provide a realistic and rich modelling ofmany economic decision-making processes.Its usage is also starting to take off in areas such as social networking software and viral marketing. The research has implications for both mobile phone companies and competition policy. Especially for larger mobile phone companies, charging different prices for on- than off-net calls can be an effective way to gain higher margins or higher market share.
Network effects have been used as an argument in antitrust cases (like US versus Microsoft) and strong global network effects are generally believed to lead to highly concentrated markets.But the research shows that network effects in mobile telecommunications are local (among friends), which militates against the tendency of network markets to be highly concentrated. Therefore,there is less need for a direct policy intervention due to network effects as has been traditionally suggested by the economic literature.
The researchers tested their ideas on groups of students in four different countries: the UK, Malaysia, the Netherlands and Italy,surveying the students about their friends within theclass and about their use of mobile phones. The first study was conducted at Nottingham University Business School and the researchers found a strong coordination of mobile phoneoperators among friends.
Friends are more than twice as likely to have the same operator as two randomly picked students. This tendency is particularly true foroverseas students, who have to choose a mobileoperator when they arrive in the UK, and who tend tohave many friends of the same nationality. Chinese students, for example, almostexclusively use Vodafone.
This result suggests that targeting different ethnic groups can be a good marketing strategy, a strategy being deployed in several European markets. Ay Yildiz, for example, targets ethnic Turkish people in Germany with cheap calls to Turkey and a Turkish language service.
The students’ effort to coordinate their choice ofmobile operators was only true for operators thatcharge a price difference between on-and off-netcalls, which shows that coordination is due to price differences rather than word-of-mouth recommendations.This study is one of the first to be able to distinguish such an effect in a communications market, something that has important implications for marketing and competition policy.
Further interesting insights were gained from the international dimension of the study. Students in countries where mobile phone companies charge different prices for calls to the same network than calls to other networks coordinate their mobile phone operator. But this is not true in the Netherlands, where companies do not charge different prices.
Looking at the network within the class only capturesone part of a student’s social network. The researcherssuggest that it underestimates the importance ofsocial networks in consumer choice and that studentsare coordinating even more strongly with theirpartners and families.
Italian students, for example, strongly coordinate operator choice in their family. Interestingly, Italian students coordinated their mobile phone operator significantly with their mothers, but not with their fathers.
ENDS
Notes for editors: ‘Network Effects, Network Structure and Consumer Interaction in Mobile Telecommunications in Europe and Asia’ by Daniel Birke and Peter Swannwas presented at the Royal Economic Society’s 2007 Annual Conference at the University of Warwick, 11-13 April.
Daniel Birke and Peter Swannare at Nottingham University Business School.
For further information: contact Daniel Birke on +447906634329 (email: ); or Romesh Vaitilingam on 07768-661095 (email: ).
Explanation of Graph:
The picture sums up the basic idea behind our research quite nicely and shows a class of students at Nottingham University Business School. Students are depicted as nodes and connected by arrows if they communicate with each other. The algorithm behind the graph is based on the idea of representing the social network graph as a system of mass particles. Nodes are the mass particles that repel each other and the edges are springs that exert an attractive force between nodes. Connected respondents will therefore be grouped together, whereas unconnected respondents will be separated. A clustering according to nationalities (shapes) and mobile phone operators used (colours) is very obvious and shows how respondents of the study coordinated their choice of mobile phone operator.
The nodes are coded as follows:
Circles => British, Squares => other Europeans, Up triangles => Chinese, Diamonds => other Asians, Down triangles => Africans, Plus => the Americas
Magenta => ‘3’, Black => O2, Grey => Orange, Blue => T-Mobile, Dark green => Virgin, Red => Vodafone, Light green => other operators