The Adoption of Network Goods: Evidence from the Spread of Mobile Phones in Rwanda
Abstract
This article develops a method to estimate and simulate the adoption of a network good. I estimate demand for mobile phones as a function of individuals’ social networks, coverage, and prices, using transaction data from nearly the entire network of Rwandan mobile phone subscribers at the time, over 4.5 years. I estimate the utility of adopting a phone based on its eventual usage: subscribers pay on the margin, so calls reveal the value of communicating with each contact. I use this structural model to simulate the effects of two policies. A requirement to serve rural areas lowered operator profits but increased net social welfare. Developing countries heavily tax mobile phones, but standard metrics that neglect network effects grossly understate the true welfare cost in a growing network, which is up to 3.12 times the revenue raised. Shifting from handset to usage taxes would have increased the surplus of poorer users by at least 26%.