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Abstract
There are two major public utility industries in the United States today: telecommunications and electricity production. The pricing schemes of the two have not been very similar. Electric utilities have always charged separate prices for access and usage. That is to say that electric utilities have charged a fee for connection to the system and also a fee based on the consumption of electricity. Most telephone companies have combined local charges for access and usage into a single fee or flat rate. There is currently a strong movement under way in the telephone industry to unbundle access charges and usage charges for local telephone service. Pricing schemes with separate access and usage charges are called measured service options.
The Bell System decision to make local measured service or, LMS, optional presents some special prediction problems if revenues are to be estimated. Predicting which option a household will choose involves analyzing a selection problem, referred to as the choice of class of service. The percent choosing measured service is known as the "take rate" in the vernacular of the telephone industry. This study will focus on predicting the "take rate."
The choice of class of service is modeled in a logit framework. The nested logit procedure is employed as the estimation method because of its utility maximizing basis, its relative computational simplicity, and its ability to model choice processes in which some decisions are more similar than others, as is presumed to be the case in the Southern Bell experiments. The two measured options may be viewed by customers much less distinctly than the flat rate option versus either measured option.
The three major findings of this study are that the measured options are perceived as being very similar, many personal calls may originate from businesses if the pricing structure is changed, and that the flat rate price will have to be nearly doubled before the "take rate" for flat rate pricing is significantly diminished.
