Mobile termination charges: Calling Party Pays versus Receiving Party Pays

Abstract

In many countries there is widespread concern at the level of mobile termination charges. This is attributable to the bottleneck monopoly created by the Calling Party Pays (CPP) principle. It has led to increasingly severe price controls on termination charges. Regulatory experience in the three foremost such countries (UK, Australia and New Zealand) suggests that price controls are of limited effectiveness in aligning termination charges with costs, that net welfare gains from controls are small and that costs of setting controls are high. The Receiving Party Pays (RPP) principle, which applies in North America and several Asian countries, avoids the bottleneck monopoly problem. After allowing for various economic and technical average revenue (price) per call is significantly lower with RPP, average minutes of usage per subscriber are significantly higher and the mobile penetration rate is not significantly different. Handset subsidies seem to be lower in the US (with RPP) than in the UK (with CPP). Surprisingly, CPP regulators have either ignored RPP or rejected it for various alleged disadvantages. These do not withstand investigation. However, in CPP countries there is still concern about the idea of paying to receive calls. There is a way to get the benefits associated with RPP without this disadvantage. RPP is based on a ‘bill and keep’ regime. Some mobile operators in RPP countries are now offering customers the option of calling plans with free incoming calls. Changing to a ‘bill and keep’ regime would avoid the bottleneck monopoly and associated distortions of conventional CPP regimes, yet enable operators and customers themselves to choose how to pay for calls—in effect, to choose between CPP and RPP.