Demand and innovation in services: The case of mobile communications

This paper aims to analyse the pricing strategies of mobile communications operators and examine the role of demand characteristics in the development of new tariff plans. In so doing, we depart from a traditional industrial organization approach to price discrimination and interpret new tariff plans as innovations. In the spirit of Schumpeter, we look at competition in this sector as depending upon this form of innovation, and we argue that, given the specific features of the industry, the development of new tariff plans is strongly related to the users’ characteristics and behaviour. Our main point is that in a context of uncertainty, demand affects firms’ innovative strategies in two ways: first, by providing information on user behaviour and by increasing the capability of market segmentation; and second, by providing the incentives to innovate. This argument is supported by an empirical analysis carried out on the basis of an original dataset which includes all the tariff plans on offer in the history of the Italian market between 1992 and 2005. We find that both a firm's installed customer base and the level of market saturation play a role in shaping firms’ innovative pricing strategies, in terms of the number and characteristics of the new tariff plans.