Network-Based Price Discrimination and `Bill-and-Keep' vs. `Cost-Based' Regulation of Mobile Termination Rates

Abstract

This paper surveys the recent literature on competition between mobile networks in the presence of call externalities and network effects. It argues that the regulation of mobile termination rates based on fully allocated costs, or “long-run incremental cost plus," exacerbates the network effects associated with “tariff-mediated network externalities," by increasing mobile networks' on-net/off-net price differentials. This reduces welfare and acts as a barrier to growth for smaller networks and new entrants. The paper argues for the adoption of “bill-and-keep" for mobile termination rates, and responds to recent theoretical arguments which suggest that such a move might harm mobile subscribers.