An Econometric Analysis of the Effects of Mobile Termination Rates on the Telecom Services Market in a Developing Country: Evidence from Microdata

Abstract

Mobile network operators may use high mobile termination rates to harm competition, with the effect of also harming consumers. Termination rates are the fees paid by a network operator to another network operator to terminate a call on the other operator’s network. Together with on-network discounts, excessive mobile termination rates have the effects of distorting market conditions, discouraging consumer switching, discouraging new entrants in the market, increasing consumer prices, and otherwise harming competition. Regulation is necessary because each mobile network is essentially a monopoly for the termination of calls, resulting in a failure of market mechanisms to prevent or correct the conditions mentioned. We examine the case of Rwanda, where regulatory intervention became necessary to correct market failures. Like regulators in many developing countries, the Regulatory Authority faced several unique challenges. Among these is the issue of investment in infrastructure development, where the need to create new infrastructure is substantial, it is difficult to attract investment, no alternative service providers exist if an incumbent exits the market, and average revenue per user is relatively low. Regulators in these markets face difficult decisions due to the desire to serve consumers while also encouraging competition, innovation, and investment. Additionally, there was no existing data on the effects of such regulation for Rwanda, and relatively little relevant data available from other developing countries. In this paper, we partner with the telecommunications regulatory authority to analyze publicly unavailable data collected directly by the regulator. This paper uses monthly panel data from telecom companies two and a half years before and after implementing mobile termination rate regulations. We use both fixed effect and interaction term regression models to examine the relationship between termination charges and on/off-network calling prices, on-network discounts, and calling price elasticity. We use the Herfindahl-Hirschman Index to consider the effects, if any, on market concentration and competitiveness. We also examine some of the regulatory challenges to implement the regulation of interconnection rates. The analysis serves as a case study not only for Rwanda but as the context for many developing countries facing similar questions around the approach to, and impact of, mobile termination rate regulation on operator revenues, consumer pricing, competition, and appropriate regulation.