Regulation Of Mobile Termination Rates Research Articles

An Econometric Analysis of the Effects of Mobile Termination Rates on the Telecom Services Market in a Developing Country: Evidence from Microdata

Mobile network operators may use high mobile termination rates to harm competition, with the effect of also harming consumers. Termination rates are the fees paid by a network operator to another network operator to terminate a call on the other operator’s network. Together with on-network discounts, excessive mobile termination rates have the effects of distorting market conditions, discouraging consumer switching, discouraging new entrants in the market, increasing consumer prices, and otherwise harming competition. Regulation is necessary because each mobile network is essentially a monopoly for the termination of calls, resulting in a failure of market mechanisms to prevent or correct the conditions mentioned. We examine the case of Rwanda, where regulatory intervention became necessary to correct market failures. Like regulators in many developing countries, the Regulatory Authority faced several unique challenges. Among these is the issue of investment in infrastructure development, where the need to create new infrastructure is substantial, it is difficult to attract investment, no alternative service providers exist if an incumbent exits the market, and average revenue per user is relatively low. Regulators in these markets face difficult decisions due to the desire to serve consumers while also encouraging competition, innovation, and investment. Additionally, there was no existing data on the effects of such regulation for Rwanda, and relatively little relevant data available from other developing countries. In this paper, we partner with the telecommunications regulatory authority to analyze publicly unavailable data collected directly by the regulator. This paper uses monthly panel data from telecom companies two and a half years before and after implementing mobile termination rate regulations. We use both fixed effect and interaction term regression models to examine the relationship between termination charges and on/off-network calling prices, on-network discounts, and calling price elasticity. We use the Herfindahl-Hirschman Index to consider the effects, if any, on market concentration and competitiveness. We also examine some of the regulatory challenges to implement the regulation of interconnection rates. The analysis serves as a case study not only for Rwanda but as the context for many developing countries facing similar questions around the approach to, and impact of, mobile termination rate regulation on operator revenues, consumer pricing, competition, and appropriate regulation.

Distribution of the benefits of regulation vs. competition: The case of mobile telephony in South Africa

We test for the distributional effects of regulation and entry in the mobile telecommunications sector in a highly unequal country, South Africa. Using six waves of a consumer survey of over 134,000 individuals between 2009–2014, we estimate a discrete choice model allowing for individual-specific price-responsiveness and preferences for network operators. Next, we use a demand and supply equilibrium framework to simulate prices and the distribution of welfare without entry and mobile termination rate regulation. We find that, in the South African context, regulation benefits consumers significantly more than entry does, and that high-income consumers and city-dwellers benefit more in terms of increased consumer surplus.

Benefits of Regulation vs. Competition Where Inequality is High: The Case of Mobile Telephony in South Africa

We test for the distributional effects of regulation and entry in the mobile telecommunications sector in a highly unequal country, South Africa. Using six waves of a consumer survey of over 134,000 individuals between 2009-2014, we estimate a discrete-choice model allowing for individual-specific price-responsiveness and preferences for network operators. Next, we use a demand and supply equilibrium framework to simulate prices and the distribution of welfare without entry and mobile termination rate regulation. We find that regulation benefits consumers significantly more than entry does, and that high-income consumers and city-dwellers benefit more in terms of increased consumer surplus.

Evaluating a Decade of Mobile Termination Rate Regulation

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.

Evaluating a Decade of Mobile Termination Rate Regulation

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, has disappeared over the 10-year period, 2002-2011. We argue that this is due 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. This implies that regulation does not have unintended consequences anymore. Over the same decade, there is no evidence that regulation caused a reduction in mobile operators’ profits and investments.

Network effects and preference heterogeneity in the case of mobile telecommunications markets

This paper demonstrates how revealed- and stated-preference analyses can be used for modeling network effects in the field of mobile telecommunications. The aim of this study was to verify if network effects may still play a role in the Polish mobile telecommunications market, measure their strength, identify their sources and variability across consumers by accounting for consumers' observable and unobservable preference heterogeneity, evaluate their monetary value to consumers, and finally, to verify if the marginal utility associated with network effects is constant. The analysis of consumers' revealed choices (currently used mobile telephone operator) allowed the identification of major differences between customer bases of incumbent and new entrant operators, and insight into the business strategies adopted in the presence of asymmetric regulation of mobile termination rates. The second part of the study—the analysis of the consumers' stated choices (made in carefully prepared and designed hypothetical choice situations, known as the choice experiments) made it possible to directly model consumers' utility functions and, in this way, investigate the nature of network effects in mobile telecommunications markets. From the results, the presence of strong network effects, which are related to the ratio of consumers' social network group using the same operator, and to the magnitude of on-net price discounts, is confirmed. These network effects can be disaggregated to pecuniary and non-pecuniary effects. Through the utilization of the random parameters multinomial logit model, consumers' observable and unobservable preference heterogeneity can be accounted for, which proved a scientifically revealing and potentially policy-relevant approach. The results might be of a particular interest to other researchers aiming at modeling consumers' preferences as well as to mobile telephone operators and regulatory authorities—it is shown that capacity for vigorous price competition between mobile operators is limited by non-price factors, which affect subscriber's choices, especially in the presence of asymmetric mobile termination rates.

The Welfare Effects of Mobile Termination Rate Regulation in Asymmetric Oligopolies: The Case of Spain

We examine the effects of mobile termination rate regulation in asymmetric oligopolies. We do this by extending existing models of asymmetric duopoly and symmetric oligopoly where consumer expectations about market shares are passive. We first calibrate product differentiation parameters using detailed data from the Spanish market from 2010. Next, we predict equilibrium outcomes and welfare effects under alternative scenarios of future termination rates. Lowering termination rates typically lowers profits of all networks and improves consumer and total surplus.

Ex-Ante Asymmetric Regulation and Retail Mmarket Competition: Evidence from Europe’s Mobile Industry

The aim of this paper is to assess the impacts of ex-ante asymmetric mobile termination rate regulation on ex-post market competition in the Europe’s mobile industry. Two regulatory instruments associated with the asymmetry between operators are implemented, namely glide path regulation and asymmetric regulation. The first regulatory device is to gradually decrease asymmetric treatment between mobile and fixed network operators while the second one is associated with asymmetric flexibility in setting MTRs between European mobile operators. With different model specifications, our study demonstrates that when the MTRs are regulated to lower levels, later entrants are likely to cut retail prices to gain more subscribers, and resulting in lower average national service prices. Furthermore, we find that asymmetric regulation plays a positive role on entrant penetration as well as the competitiveness of Europe’s mobile markets.

Asymmetric Regulation of Mobile Access Charges and Consumer Welfare with Price Regulation

Asymmetric regulation as applied to mobile termination rates refers to regulatory arrangements in which different mobile operators charge different termination rates, even though the services provided are essentially identical. The asymmetric regulation has been frequently used as a regulatory tool to support new entrants to a mobile market. This paper examines the economic effects of asymmetric regulation of mobile termination rates using a theoretical model and its simulation. The result shows that when there is no noticeable difference in brand loyalty between mobile operators with the high degree of substitutability between services provided by mobile operators, and the costs of new entrants are low, a reduction in the asymmetry of mobile access prices results in an enhancement of consumer welfare. These findings provide positive evidence for the argument that in certain situations asymmetric pricing of mobile access services may be counterproductive for consumer welfare.

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

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.

Regulation and Diffusion of Mobile Telecommunication Services: An Explorative Case Study Approach of Static and Dynamic Regulation in Mobile Telephony Regulation

Regulation of mobile termination rates is implemented in many countries and disputed heavily in research literature for its effects. By classifying different regulatory approaches of cost calculation and symmetry into static and dynamic regulation, possible effects on diffusion are extracted. These effects on diffusion are investigated further by analyzing in detail the mobile termination regulation of four countries and contrasting it with the resulted diffusion. Though generally asymmetric regulation and generous cost accounting seem to foster diffusion, no strict relationship can be found.

On-Net/Off-Net Price Discrimination and 'Bill-and-Keep' vs. 'Cost-Based' Regulation of Mobile Termination Rates

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 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.

What Mobile Termination Regime for Asymmetric Firms with a Calling Club Effect?

The aim of our paper is to determine the efficiency of asymmetric regulation of mobile termination rates (MTRs) in a market where firms are differentiated in size and with commercial offers including calling club effects. Major regulatory issues are related to these analyses, since some European National Regulatory Authorities and the European Commission tend to question asymmetric regulation mechanisms. Based on a model designed to determine firm profits and consumer surplus, our main results are the following: a) Asymmetric regulation of MTRs may contribute to increase welfare. If the impact is neutral regarding firms (simple reallocation of profits from the large to the small player), consumer surplus is increased; b) The appropriate way to proceed is to decrease the large firm's MTRs, rather than increasing the smaller firm's ones, which could produce negative side effects; c) From a dynamic point of view, appropriate asymmetric regulation may contribute to balance market shares and, in such a way, to compensate first mover advantages.

Competition and Regulation Issues in Telecommunications

This document (of 416 pages) comprises the proceedings of an OECD roundtable on competition issues in the telecommunications industry, which was held in May 2001. This document discusses issues such as the regulation of mobile termination rates, whether to impose mandatory roaming, competition effects of flat rate calling packages, differential charging for on - and off - net calls and mergers in the telecommunications industry. A common theme behind many of these issues is a mis-match between the structure of access charges and retail charges. When access charges are less differentiated that retail charges, competition from rivals will be distorted (and perhaps highly restricted) and retail tariff structures will come under pressure. This document consists of a background paper by the Secretariat, submissions from 19 OECD countries and a summary of the oral discussion.