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economics

The benefits of cell phones in emerging markets


Why do cell phones have such an enormous economic impact in emerging markets? What are the economic impacts of cell phones in emerging markets? How big are the economic benefits of cell phones in emerging markets?

The marginal value of cell phones in emerging markets is particularly great precisely because the available substitutes are expensive, slow, unreliable, or just hard to figure out. Whereas in an economy with good infrastructure, cell phones can be replaced with land lines or email, an economy with only cell phones would otherwise have to rely on expensive and slow face-to-face visits, mail, radio air time, and print publications to replace the calls.

The simplest answer to the question is of trivial value. We could simply answer the question by finding the value of all the cell phones and cell phone plans sold in emerging markets. That would tell us nothing about the most important impact cell phones have on emerging markets: how they change businesses other than cell phone sales.

A lot of good scholarship has looked at a second impact in emerging markets. Jensen (2007) was reviewed by the Economist in 2007 looking at the market for fresh fish in India. Prior to the introduction of cell phones, fishermen had only heuristics to tell them which market would bring the best price for their fish, and whether a marginal trip to sea would turn a profit. Fishermen had no reliable way to tell what the prices were in all of the markets their boats could reach. They had to guess. Jensen observed two effects of cell phones in this market. First, the dispersion of prices among coastal fish markets dropped dramatically. Jensen inferred that this meant fishermen were using cell phones to identify the market with the highest price, net of costs, for each individual boat’s catch. Interviews bore out this hypothesis. Second, the share of the total catch wasted on any given day dropped precipitously. This, Jensen inferred and corroborated with interview evidence, was a result of greater knowledge of hourly market conditions. Fishermen wouldn’t launch unless they were reasonably certain of finding a buyer for the catch.

Stigler (1961) tells us that we should expect price dispersion to fall when information is cheap and freely available. The more information each buyer and each seller have about prices in a market, the more reliably each can get the best deal available. This eliminates arbitrage opportunities and enforces the law of one price.

Aker (2008) shows us a similar finding in Niger’s grain markets over a five-year period. As the cell phone towers rolled out to districts for the first time, the dispersion of grain prices among the markets with phone service dropped.

I will argue, following Brandenburger and Stuart (1996) that the price dispersion method is only one way, and not the best way to estimate either the qualitative role or the economic value that cell phones hold for emerging markets. The price dispersion method enables us to identify markets that reasonably approximate efficient equilibria. The breakdown of the law of one price suggests inefficient allocation of productive factors, and likely inefficient consumption outcomes. But evidence of price dispersion causes us, again following Stigler, to think that the primary role of the cell phone is to reduce the cost of search _for the purpose of price discovery_.

A better way line of reasoning starts with the thesis that they enable innovation, specialization, market identification, and market entry. The primary value of cell phones in emerging markets is to create new transactions, rather than to affect the price and location at which transactions occur.

Brandenburger and Stuart (1996) give a formula for calculating the value added to the economy of every transaction: the difference between the customer’s willingness to pay and the supplier’s opportunity cost. We think of the firm as creating two sets of transactions: purchases from suppliers and sales to customers. This is similar to (though technically different from) calculating the total surplus created by the firm’s existence, viz. the sum of:

  1. the producer surplus accruing to the firm and its suppliers, and
  2. the consumer surplus accruing to the firm and its customers.

The firm’s contribution to the economy grows every time it increases the customer’s willingness to pay for the service and reducers its suppliers’ opportunity cost, _regardless of whether the firm’s own prices and costs change at all_. The firm’s economic value every time it discovers new customers that had unmet needs, and every time it discovers a way to bring more efficient suppliers into value chain. The firm’s contribution to the economy, in one sense, is the total net welfare that it created via all of its transactions.

Think of the applications of cell phone technologies in emerging markets. Cell phones permit the arrangement of the timing, location, and manner of every imaginable good and service. Cell phones permit businesses to identify would-be customers and vice versa. Cheap, constant communication permits businesses to customize their delivery of goods and services in ways that only the customers could tell them to innovate.

The marginal impact of a business on the total economy depends on the behavior of the economy when that firm is eliminated. In a competitive market with undifferentiated goods, the marginal value of any small firm is approximately zero. But to the extent that firms differentiate their products, or that firm serve customers that no other firm can serve as effectively, Brandenburger and Stuart show us a way to calculate the vale of the firm in the economy. Where the customer has a lower willingness to pay for another firm’s product, and the supplier has a higher opportunity cost supplying another firm, the other firm creates a lower value in the economy. If prices are equal, we can say that another firm would always provide a lower value to the total economy–even if one firm’s exit didn’t change prices at all.

Empirical strategies for estimating willingness to pay are hugely varied. The objective, however, is simple: to identify indifference sets for the customer and the supplier.

A better microeconomic approach would do just that for households and firms that use cell phones. The economist should seek to answer the following questions for firms that use cell phones in emerging markets.

  1. How would the firm identify and choose among suppliers without cell phones?
  2. How would the firm obtain intermediate goods and services from suppliers without cell phones?
  3. How would the firm obtain human resources and capital equipment without cell phones?
  4. How would the firm make allocation decisions without cell phones?
  5. How would the firm manufacture goods and provide services without cell phones?
  6. How would the firm identify and retain customers without cell phones?

The answers to all of these questions should permit careful welfare analysis of the role that cell phones play in emerging markets. Where cell phones have few substitutes and have been recently introduced, the answers to these questions will be readily apparent with interviews and appropriate samples. Where cell phones have many substitutes and greater longevity, the analysis will be more speculative and difficult.

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About Ben Mazzotta

Ben Mazzotta is a postdoc at the Center for Emerging Market Enterprises (CEME). His study of the Cost of Cash is part of CEME's research into inclusive growth.

Discussion

One thought on “The benefits of cell phones in emerging markets

  1. Nice post, keep up the good work.

    Posted by cricket wireless | December 15, 2008, 12:57 am

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