Three-Part Tariffs and Short-Run Rationality in the Local Fixed Telephone Consumption: Empirical Evidence from Medellín

In this paper we are interested in investigating the effects of the three-part tariffs system on consumers’ behavior in the local fixed telephone service provided by the incumbent Telecommunications Company UNE in Medellín, which was authorized by the Telecommunications Regulatory Commission (CRT, for its Spanish name). In order to study consumer behavior and the effect of this tariff system we specify a sort of Engel Curve, which relates expenditure in fixed telephone service and expenditure in public utilities. Endogeneity problems could well arise from this specification, so the empirical strategy for studying households’ consumption is based on a panel data analysis by performing instrumental variables and GMM procedures. Our results support the hypothesis that consumers surpass expected consumption levels and therefore the total payment for the service is greater than planned, showing a sort of short-run irrationality in consumption.

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