User interaction and business model innovation in the telecommunications industry

The contributions of this thesis are both theoretical and empirical analyses which fall in the domain of the study of industrial organisation and its implications for corporate and governmental policy-makers in the communications industries. It delves upon the role of user interaction and externalities in shaping business models in the telecommunications industry. Amongst the contribution of this study is an empirical analysis of the impact of user interaction on the demand for telecommunications. Specifically, this work measures mobile telephony demand estimating a point-to-point model of the text messaging traffic exchanged cross-network. The empirical analysis relies on a dataset spanning 15 countries for the period 2002-2007. The econometric estimates of impact and total price elasticities indicate that incoming traffic is a key driver of SMS demand -- thus confirming existing findings -- while for the first time disentangling the impact of incoming traffic from that of network size. The results hold implications for theories of network competition (the separability of demand debate), optimal pricing by telecommunications operators and regulatory analyses. Communications firms are currently exploring alternative business models to overcome the threat of commoditisation. The development of revenue sources other than users (such as advertisers) leverages cross-market externalities and affects the competitive dynamics in communications markets, as discussed in the burgeoning economic literature on two-sided markets. This work introduces a game theory duopoly model of asymmetric competition where a platform firm competes with a one-sided business firm, thus analysing the implications of business model innovation. The case study drawn from the analysis is set in the context of the mobile industry and its recent developments, thus leading to a set of strategic implications for platform firms.