The Effects of Lower Mobile Termination Rates (MTRs) on Retail Price and Demand

Abstract

A number of initiatives are under way that will either greatly lower Mobile Termination Rates (MTRs ) – the wholesale payments from the originating network operator whose call initiates the call to the terminating network operator whose customer receives the call – or perhaps even eliminate them altogether. A key policy basis for these proposals and changes is the belief that lower MTRs would tend to lead to lower retail unit prices for most end-users, and that the lower retail prices would be associated with higher usage. There are strong theoretical grounds to believe that this is so. The notion is further bolstered by comparisons to the U.S., where MTRs are effectively zero, minutes of use are twice as high as those of any European country, and service-based revenue per minute of use (which serves as a normalised proxy for retail price) is lower than that of any European country. But is this really true‘ Various parties have disputed these relationships. If lower MTRs were to lead to higher retail prices, then the policy rationale for these European initiatives might be called into question. A great deal hangs on the answer to these questions. This paper provides preliminary results of a WIK research project that aims to shed further light on this controversial issue. We study the impact of MTRs on retail prices and demand for 61 Mobile Network Operators (MNOs) from 16 European Member States in the period between 2003 and 2008. We consider the likely effects of lower MTRs within a Calling Party's Network Pays (CPNP) regime.