Review of Industrial Organization 20: 367–374, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Substitution between Mobile and Fixed Telephones
University of Seoul, Faculty of Economics, 90 Cheonnong-dong, Dongdaemun-gu, Seoul 130-743,
Korea Telecom, Management Research Lab, 206 Jungja- dong, Bundang-gu, Sungnam 463-711,
Abstract. The stock of mobile telephones has surpassed ﬁxed phones in Korea. Presently, the density
is more than 60 of every 100 inhabitants. Thus, the potential for mobile telephones to become a
substitute for, and directly compete with ﬁxed telephones, has become evident. The aim of this
paper is to examine the impact of rapid growth in mobile telephones on the access demand for
traditional ﬁxed telephones. The study shows that a 1% increase in the number of mobile telephones
results in a reduction of 0.10–0.18% in new ﬁxed connections and a 0.14–0.22% increase in ﬁxed
disconnections. The empirical analysis is carried out with Korean regional panel data for the period
1991–1998. The study is relevant to several important public policy issues.
Key words: Panel data, substitution effects, telephone industry.
JEL Classiﬁcations: D12, L96.
In most countries throughout the world, mobile (cellular) telephones have grown
to be an integral part of the public telecommunication network. At the end of 1999,
there were more than 470 million mobile subscribers around the world, up from
just 11 million in 1990. The average mobile penetration rate of OECD countries
was 32.4 per 100 inhabitants (OECD, 2001). Mobile telephones already account
for almost one-third of all telephone connections. It seems likely that in a few
years the number of mobile telephone subscribers will surpass conventional ﬁxed
telephones or ﬁxed line connections as the dominant form of telecommunications
in the world.
Until recently, mobile telephones were believed to serve primarily as a com-
plement to ﬁxed telephones. The presence of mobile telephones confers a beneﬁt
Sung acknowledges that the University of Seoul provided ﬁnancial support for this project in