Mobile termination rates and retail regimes in Europe and the US: A unified theory of CPP and RPP

Abstract

We analyse an oligopoly model where mobile operators may charge subscribers for placing and receiving calls. We compare the CPP equilibrium (where receiving calls is free) with the RPP equilibrium (where placing and receiving calls are priced equally). Reducing termination rates leads to lower prices and higher penetration under CPP, but has reversed effects under RPP. No termination rate yields efficiency under either retail regime. Comparing EU practice (CPP with termination regulated at cost) and US practice (RPP with Bill and Keep), we find that total surplus is higher in the US when the value of receiving calls is very high, but both producer and consumer surplus are higher in the EU for intermediate values of the call externality. If call externality is higher (resp., lower), consumers (resp., producers) are better off in the US.