Evaluating a Decade of Mobile Termination Rate Regulation

Christos Genakos,Tommaso Valletti

doi:10.1111/ecoj.12194

Christos Genakos, Tommaso Valletti

Open Access

https://doi.org/10.1111/ecoj.12194

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Abstract

We re-consider the impact that regulation of call termination on mobile phones has had on mobile customers’ bills. Using a large panel covering 27 countries, we find that the ‘waterbed’ phenomenon, initially observed until early 2006, becomes insignificant on average over the 10-year period, 2002–11. We argue that this is related to the changing nature of the industry, whereby mobile-to-mobile traffic now plays a much bigger role compared to fixed-to-mobile calls in earlier periods. Over the same decade, we find no evidence that regulation caused a reduction in mobile operators’ profits and investments.

Highlights

Mobile communications markets have been growing at an impressive rate over the last two decades, with worldwide subscriptions increasing from a few million in the 90s to seven billion users in 2013 on all continents.4 Competition in the industry has been quite vigorous, and regulators have not interfered much with the workings of the market
Both academics and mobile operators have argued that reducing the level of mobile termination rates can potentially increase, instead of decrease, the level of prices for mobile subscribers, causing what it was termed as the “waterbed” effect
In our earlier work (Genakos and Valletti, 2011), using data for the period 2002-2006, we showed that, countries that introduced regulation that cut the termination rates caused a significant waterbed effect, whereby a ten percent reduction in mobile termination rates led to a 5% increase in mobile retail prices, varying between 2%-15% depending on the estimate

Summary

Introduction

Mobile (or cellular) communications markets have been growing at an impressive rate over the last two decades, with worldwide subscriptions increasing from a few million in the 90s to seven billion users in 2013 on all continents. Competition in the industry has been quite vigorous, and regulators have not interfered much with the workings of the market. Regulators in particular worry about inter-network (termination) charges for calls to mobile networks, and starting in the early 2000s have repeatedly intervened over the years to cut these charges with the aim to improve competition and reduce prices to final consumers. Both academics and mobile operators have argued that reducing the level of mobile termination rates can potentially increase, instead of decrease, the level of prices for mobile subscribers, causing what it was termed as the “waterbed” effect. Cuts in termination rates before 2006 had led to the possibly adverse consequence of increasing the yearly bill per mobile subscriber by roughly 25 euros (varying from 10 to 82 euros), or some 750 million euros (varying from 300 to 2,400 million) extra in total in our sample

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