The effects of the Internet and mobile services on urban household expenditures: The case of South Korea

• This paper examines demand for telecoms services during 1998-2014 in South Korea.
• The Almost Ideal Demand System is implemented in the short-run and long-run models.
• The demand for telecoms services is income inelastic over the whole analysis period.
• Price elasticity of demand for telecoms services noticeably increased after 2007.
• Substitution relationships with other existing goods/services have been reinforced.

This paper investigates the changes in the structure of the household expenditure on telecommunications services and its relationships with other existing expenditures in South Korea employing the average household monthly expenditure from 1998.Q1 to 2014.4Q. The linear approximate Almost Ideal Demand System (LA/AIDS) is implemented in both short-run and long-run models. The short-run relationship is estimated using a seemingly unrelated regression (SUR) with first differenced series of data, and the long-run relationship is examined through a Vector Error Correction Model (VECM). Both sets of empirical results suggest that the household demand for telecommunications services is income inelastic over the whole analysis period, and the absolute value of the own price elasticity noticeably increased in the period of 2007.Q1–2014.Q4. Additionally, the estimations from the VECM LA/AIDS model suggest that the relationship between telecommunications services and other existing goods/services such as public transportations, cultural services, books and private education had a complementary relationship in the early period of the Internet and mobile services. However, a substitution relationship has tended to be reinforced after the Internet and mobile services came into widespread use.